Learning and the dynamics of postsecondary education

An important number of high-school graduates start their post-secondary educational careers at academic 2-year colleges even though returns to graduation are negligible. However, the returns to transferring to 4-year colleges are large: academic 2-year colleges act as a stepping stone in which agents learn about themselves in a cheaper and less demanding environment than 4-year colleges. This paper presents a model of educational choice that incorporates academic 2-year colleges together with 4-year colleges and work. Agents are initially uncertain about their innate ability to accumulate human capital. Pessimistic agents join the workforce, optimistic agents enroll in 4-year colleges and those in the middle enroll in academic 2-year colleges. Exams govern the accumulation of credits and provide information that update beliefs, inducing dropouts and transfers. The model is consistent with facts that are documented for two different data sets: (1) among those initially enrolled in academic 2-year colleges, more able agents are less likely to graduate, more likely to transfer, and less likely to dropout; (2) among those initially enrolled in 4-year colleges, more able agents are more likely to graduate and less likely to dropout or transfer; (3) there is a higher concentration of high ability students among transferees. A decomposition of returns shows that the dropout and transfer options account for 90% of the full return to enrolling in an academic 2-year college while the dropout option explains 70% of the full return to enrolling in 4-year colleges. Academic 2-year colleges are found to be close substitutes for 4-year colleges and thus the welfare effect of the availability of academic 2-year colleges is limited and is primarily driven by a slight increase in participation. The model is also able to reconcile low enrollment and graduation rates with high returns at 4-year colleges. The low graduation rate results from the interaction of learning and option value while the low enrollment and wedge in returns are explained by academic 2-year colleges. viii...