Models of college choice

1. Models of college choice Seminar 3 IlyaPrakhov Research fellow, Centre for Institutional Studies Higher School of Economics , Moscow, 2012 www.hse.ru

2. Problems of transition from high schools to universities • Accessibility of higher education of a good quality • Massification and commercialization of higher education • The Unified State Examination as a new institution which affects policy of universities as well as incentives of high school graduates • Need for institutional analysis of consequences of introduction of the USE for policy recommendations photo photo photo Higher School of Economics , Moscow, 2012

3. College (university) choice: theoretical framework • Neoclassical model of college choice • Human capital theory • Screening hypothesis • Behavioral approach photo photo photo Higher School of Economics , Moscow, 2012

4. Tuition fee (F) DLG DH DL F2 F1 Pr2 Pr3 Pr1 Probability of university choice (Pr) Demand for education: neoclassical model • Key assumptions: • Perfectly rational agent – perspective student • Maximization of utility function: u(·): u’(·)>0, u”(·)<0 • Full and symmetric information • Solution: photo photo photo Higher School of Economics , Moscow, 2012

5. Neoclassical model: pros and contras • Advantages: • Simplicity • Useful tool for analysis of demand for education for different groups of students (depending on the level of income) • Analysis of impact of financial aid (grants, bursaries) on university choice • Disadvantages: • Not all empirical findings confirm the results of the model • Short-run analysis only • Criticism of perfect rationality • Criticism of symmetric information • Education is a credence good photo photo photo Higher School of Economics , Moscow, 2012

6. Human capital theory • Education is an investment in human capital (Becker G.S., 1964; Schultz T.W., 1961) • «[A] man educated at the expense of much labour and time… may be compared to one of those expensive machines.» (Adam Smith. Wealth of Nations, 1776) photo photo photo Higher School of Economics , Moscow, 2012

7. Human capital theory • Decision rule: • Costs↓ ⇒ NPV(E) ↑ ⇒ Demand for education ↑ • Benefits ↑ ⇒ NPV(E) ↑ ⇒ Demand for education ↑ • r↑ ⇒NPV(E) ↓⇒ Demand for education ↓ photo photo photo Higher School of Economics , Moscow, 2012

8. Human capital theory: pros and contras • Advantages: • Explains heterogeneity of demand for higher education in different fields (sectors of economy) • Investment in education in long-term period • Evaluation of return from education • Disadvantages: • Not all variables (costs, benefits) can be expressed in monetary terms • The real choice is made under risk and uncertainty conditions • Criticism of perfect rationality • Education may not affect productivity (⇒ screening hypothesis) • Social factors (for example, peer influence) are almost ignored, as well as non-monetary incentives for university choice (⇒ behavioral approach) photo photo photo Higher School of Economics , Moscow, 2012

9. Screening hypothesis • Education is unproductive • Education is a screening device for employer • Workers with low (marginal) productivity will remain uneducated • (Arrow K., 1973) photo photo photo Higher School of Economics , Moscow, 2012

10. Screening hypothesis: pros and contras • Advantages: • This models shows that education can be unproductive • Ambiguous findings (Layard R., Psacharopoulos G., 1974): • Salary depends on the Certificate of higher education rather than the number of years of schooling • Employer becomes more aware about characteristics of worker over time, so the effect of education on salary will decline • Education is a very costly screening mechanisms. There should be less costly screening devices • Evidence shows that additional years in university positively affect salary (Groot W., Oosterbeek H., 1994) photo photo photo Higher School of Economics , Moscow, 2012

11. Behavioral approach • Assumptions: • Bounded rationality. Agents make systematic errors due to incomplete and asymmetric information (Simon H., 1972) • When making a decision, agent takes into account not only economic costs and benefits, but psychological (behavioral, emotional) factors (Thaler R.H., 2000; Kahneman D., Tversky A., 1979) • Student’s behavior: • rules of thumb; • different perception of costs and benefits; • risk aversion; • influence of peers; • Personal expectations about future benefits. photo photo photo Higher School of Economics , Moscow, 2012

12. Empirical research Sociological models • Behavioral variables (achievement, expectations, motivation of student) • Peers variable (background, family characteristics) Economic (econometric)models Costs of higher education (tuition fees, alternative costs) • Benefits from higher education (expected salary, grants, bursaries) Mixed models • College choice is a multistep process • Both sociological and economic factors are included photo photo photo Higher School of Economics , Moscow, 2012

13. Empirical research: main results The U.S.: • Importance of SES (parental education, level of income) (Leslie L.L., Brinkman P.T., 1987; Heller D.E., 1997), • Different response to changes in tuition fee for students from low-income and high-income families (Kane T.J., 1995), • Grants and subsidies raise the probability of going to university, • Ambiguous impact of student loans (Campaigne D.A., Hossler D.E., 1998) photo photo photo Higher School of Economics , Moscow, 2012

14. Empirical research: main results Australia: • Introduction of tuition fee did not affect students’ incentives (Chapman B.J., Chia T.T., 1993; Andrews L., 1997) The UK: • Importance of social factors (peers) (Callender C., 2003) • Tuition fee is an important factors for low-income families The Netherlands: • Inelasticity of demand for education (Kodde D.A., Ritzen J.M.M., 1986) • The main factors: parental support, education, level of income(Vossensteyn J.J., 2005) • Grants almost do not matter. photo photo photo Higher School of Economics , Moscow, 2012

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