Estimating the Perceived Returns to College

Abstract

The primary determinant of an individual's college attendance is their perceived lifetime return to college. I infer agents' perceived returns by assuming a dollar-for-dollar relationship between perceived returns and tuition costs in a binary choice model of college attendance. This method has the advantage of estimating perceived returns in terms of compensating variation without assuming rational expectations on actual returns or agent knowledge of tuition costs. Estimating the model using both maximum likelihood and moment inequalities, I find that the scale of the distribution of perceived returns is an order of magnitude lower than past work has found when assuming rational expectations on income returns. The low variance I find in perceived returns implies high responses to financial aid. I predict a 2.6 percentage point increase in college attendance from a $1,000 universal annual tuition subsidy, which is consistent with quasi-experimental estimates of the effects of tuition assistance on college attendance. Because I estimate the complete distribution of perceived returns, my results can be used to predict heterogeneous effects of counterfactual financial aid policies.