Quantitative Economics: Nov, 2014, Volume 5, Issue 3

Understanding the income gradient in college attendance in Mexico: The role of heterogeneity in expected returns

Katja Maria Kaufmann

Differences in college enrollment between poor and rich are striking in Latin
America. Explanations such as differences in college preparedness and credit constraints
have been advanced. An alternative explanation could be differences in
information sets between poor and rich, for example, about career opportunities,
translating into different expected returns to college. Poor people might expect
low returns and thus decide not to attend or they might face high (unobserved)
costs that prevent them from attending despite high expected returns. I use data
on people’s subjective expectations of returns to address this identification problem.
I find that poor individuals require higher expected returns to be induced to
attend college than individuals from rich families. Testing predictions of a model
of college attendance shows that poor individuals are particularly responsive to
changes in direct costs, which is consistent with them being credit constrained.
Performing counterfactual policy experiments, I find that a sizeable fraction of
poor individuals would change their decision in response to a reduction in direct
costs and that these individuals at the margin have expected returns that are as
high or higher than the individuals already attending college.
Keywords. Schooling choice, credit constraints, subjective expectations, marginal
returns to schooling, local instrumental variables approach,Mexico.
JEL classification. I21, I22, I38, O15, O16.

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