The Inframarginal Returns to College | Hoover Institution

Quick Overview

The research models the inframarginal returns to college by developing an equilibrium model with rich occupational and individual heterogeneity, concluding that policies dramatically reducing college costs will have minimal effects on completion or individual welfare because tuition represents a small fraction of overall college costs, which are dominated by effort, time, and disutility of studying.

Key Points: Policies that significantly lower the cost of college education will yield very little effect on college completion or individual welfare because these broad policies often transfer resources to higher-income individuals who already planned to attend. The model replicates marginal income returns to college found in prior research, but actual utility gains are small because prior studies neglect substantial costs beyond tuition, such as effort and time investment. Tuition is estimated to be a small part of overall college costs; for example, the average total cost estimated might be around $300,000, while net tuition averages about $60,000 over four years. The model incorporates rich occupational heterogeneity, individual heterogeneity (absolute and comparative advantage), and costs associated with college, including effort (human capital investment) and time. The speaker notes that the share of men aged 25 to 34 with a bachelor's degree showed very little movement between 1975 and 2000 but then shot up by about 10 percentage points starting in the mid-2000s. The model is structured as a static, repeated cross-section model for 25-year-olds, where time variation is introduced by exogenous shifts in occupational productivities and returns to human capital. The utility function includes disutility from effort (S) in accumulating human capital, and this effort cost helps explain why lawyers are paid more than teachers on average.

Context: The presentation introduces a brand new paper analyzing the inframarginal returns to college, contrasting its approach with existing applied micro research that focuses only on individuals right on the margin of the college decision, often using RD specifications to estimate large income returns. The speaker aims to develop an equilibrium model incorporating occupational and individual heterogeneity to better understand how people far away from these margins respond to policies intended to expand college access, such as making college free.