Estimation of Educational Borrowing Constraints Using Returns to ...

educational borrowing constraints 133
I. Introduction
Does access to credit influence educational outcomes The answer to
this question is fundamental to sensible educational policy and to our
understanding of intergenerational transmission of inequality, returns
to schooling, economic growth, and many other economic phenomena.
Since a direct answer to the question depends on economic variables
difficult or impossible to measure, this paper explores alternative approaches
to identifying and estimating the influence of credit access on
educational choice. The key idea for identification of the role of credit
in determining schooling choices is that two types of schooling costs,
opportunity costs of schooling (the value of earnings forgone while in
school) and direct costs of schooling (monetary cost of tuition, books,
transportation, and board and room if necessary), affect schooling
choices differently for credit-constrained and unconstrained individuals.
Direct costs need financing during periods of school enrollment and
present a larger challenge to credit-constrained persons. Gross forgone
earnings, by contrast, do not have to be financed during school. 1
Empirical implementation of our approach requires distinct measures
of both direct schooling costs and opportunity costs. Following Card
(1995b), we use as a proxy for direct costs an indicator variable for the
presence of any college (either a two- or four-year college) in an individual’s
county of residence. Opportunity costs are proxied by measures
of earnings in low-skill industries located in a person’s local labor market
at the time schooling decisions are made. High prevailing wages in the
local labor market imply high forgone earnings of college attendance.
The paper reports empirical findings from four methodologically distinct
econometric approaches to estimating the importance of credit
access on schooling choice. Each method exploits implied differences
in responses of borrowing-disadvantaged students to direct costs and
forgone earnings of students to identify the magnitude of credit constraints
on schooling choice.
The first approach begins by following Lang (1993) and Card (1995a)
and estimating returns to education using an instrumental variable approach.
2 These authors explain that when the causal effect of schooling
on earnings is heterogeneous in the population, instrumental variable
techniques do not recover the population average payoff to schooling
but instead estimate the payoff to schooling for those marginal individuals
whose schooling choices are most affected by changes in the value
1
Gross forgone earnings are defined as the sum of all income earned by a person not
attending school. For expositional simplicity, our story abstracts from income students
earn during school enrollment. Those earnings would enter the model as an offset to
direct college costs, and including them affects none of the implications of our model.
2
We use the term “returns to schooling” to denote the coefficient on schooling in a
log wage regression. It is not necessarily the internal rate of return.