On the Distribution of College Dropouts: Wealth and Uninsurable Idiosyncratic Risk

Ali K. Ozdagli, Nicholas Trachter
2011 Social Science Research Network  
We present a dynamic model of college education where the students face uncertainty about their income stream after graduation due to unobserved heterogeneity in their innate scholastic ability. As students write exams, they reevaluate their expectations and may find it optimal to drop out and join the workforce without reaping the whole benefit of college education. The model shows that, in accordance with the data, poorer students are less likely to graduate and are more likely to drop out
more » ... kely to drop out earlier than wealthier students. Our model generates these results without introducing credit constraints. Conditioning on measures of innate ability, we find in the data that poor students are at least 31% more likely to drop and they do so around a year before rich students. * We thank Andrea Pozzi. We also benefited from comments by seminar participants at the Federal Reserve Bank of Boston. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Boston or the Federal Reserve System. Sarojini Rao provided excellent research assistance. All mistakes are our own.
doi:10.2139/ssrn.1799734 fatcat:i7bvdxtbzvhwjdtlg3w3lebh74