Sequential Choices, Option Values, and the Returns to Education

Abstract: Using detailed Norwegian data on earnings, education and work histories, we estimate a dynamic structural model of education and sector choices that captures rich life-cycle patterns by ability. We validate the model against variation in education choices induced by a compulsory schooling reform. Our approach allows us to estimate the ex-ante returns to different education tracks across the life-cycle by individual ability and quantify the contribution of option values. We find substantial heterogeneity in returns and establish crucial roles for option values and re-enrollment in determining education choices and the impact of schooling policies.