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Educational opportunity and the college premium
Hendel, Igal; Shapiro, Joel; Willen, Paul
Universitat Pompeu Fabra. Departament d'Economia i Empresa
Since World War II, the United States government has made improved accessto higher education a priority. This e¤ort has substantially increasedthe number of people who complete college. We show that by reducing theeffective interest rate on borrowing for education, such policies canactually increase the gap in wages between those with a college educationand those without. The mechanism that drives our results is the signaling role of education first explored by Spence (1973). We argue that financialconstraints on education reduce the value of education as a signal. Wesolve for the reduced form relationship between the interest rate and thewage premium in the steady state of a dynamic asymmetric information model.In addition, we discuss evidence of decreases in borrowing costs for educationfinancing in the U.S.
2005-09-15
Microeconomics
college loans
education signalling
college wage premium
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