Working Paper: NBER ID: w22010
Authors: Russell Cooper; Huacong Liu
Abstract: This paper studies the allocation of heterogeneous agents to levels of educational attainment. The goal is to understand the magnitudes and sources of mismatch in this assignment, both in theory and in the data. The paper presents evidence of substantial mismatch between ability and educational attainment across 21 OECD countries, with a focus on Germany, Italy, Japan and the US. In the model, mismatch originates from: (i) taste shocks, (ii) binding borrowing constraints and (iii) noisy measures of ability in test scores. The model is estimated using a simulated method of moments approach. The main finding is that measured mismatch arises largely from noise in test scores and does not reflect borrowing constraints. Differences in tastes for education across households play a minor role in explaining mismatch. Further, the estimation allows us to decompose the college wage premium, isolating cross-country differences in selection effects from the return to education.
Keywords: No keywords provided
JEL Codes: E24; I26; J24; O43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| noise in test scores (C12) | mismatch between ability and educational attainment (I24) |
| high ability agents (L85) | high levels of education (I25) |
| binding borrowing constraints (F34) | mismatch between ability and educational attainment (I24) |
| differences in educational tastes (I24) | mismatch between ability and educational attainment (I24) |
| mismatch between ability and educational attainment (I24) | noise in test scores (C12) |
| cross-country variations in education rates (I24) | wage premiums (J31) |