Tuesday May 2 in room A822 at 13:00

Title: A Nudge to School: Triangulating the Gains

Abstract:

Recent research and policies use (often small) incentives for students to increase their years of schooling. A working assumption justifying such incentives is that the optimal years of schooling is greater than that which would be otherwise be obtained by the target population. I combine this hypothesis with an older literature (for example Harberger 1971) that uses triangles to estimate approximate misallocation. Using well-identified parameter estimates from recent papers, I implement two strategies to measure the loss to a student from an underinvestment of (a somewhat implausible) four years of school. The first strategy is based on the wage appearing both in the marginal benefits and opportunity costs of schooling, which constrains the present value of losses from supposed underinvestment in schooling to be less than a few percent of lifetime income. The second strategy employs estimates of the elasticity of the response of school to marginal benefits. This indicates a loss of less than 6%. These numbers being areas of triangles, they are proportional to the square of misallocation; therefore, they would be smaller by a factor of four if the underinvestment was only two years, and by a factor of eight with just one year of underinvestment.

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