Educational Opportunity and the College Premium

Posted: 11 Sep 2002

See all articles by Igal Hendel

Igal Hendel

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Joel Shapiro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Abstract

Since World War II, the United States government has made improved access to higher education a priority. This effort has substantially increased the number of people who complete college. We show that by reducing the effective interest rate on borrowing for education, such policies can actually increase the gap in wages between those with a college education and those without. The mechanism that drives our results is the 'signaling' role of education first explored by Spence (1973). We argue that financial constraints on education reduce the value of education as a signal. We solve for the reduced form relationship between the interest rate and the wage premium in the steady state of a dynamic asymmetric information model. In addition, we discuss evidence of decreases in borrowing costs for education financing in the U.S

Suggested Citation

Hendel, Igal E. and Shapiro, Joel David and Willen, Paul S., Educational Opportunity and the College Premium. Available at SSRN: https://ssrn.com/abstract=310236

Igal E. Hendel

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joel David Shapiro (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 27 18 (Phone)
+34 93 542 17 46 (Fax)

Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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