Formation of College Plans: Expected Returns, Preferences, and Adjustment Process

Abstract

Abstract We exploit a large exogenous shock to study the formation, and updating, of educational plans, and to examine how these plans ultimately impact later educational attainment. Using novel, longitudinal, microdata on cohorts of East German adolescents before and after the German Reunification (a change for the East from state socialism to capitalist democracy), and using differences across cohorts induced by the timing of Reunification, we show that shortly after relative to before that time, college plans among high-school students increased substantially, which was followed by sizable increases in the completion of the college entrance certificate 5 years later. To shed light on the underlying mechanisms, we analyze the elasticity of youths’ beliefs and preferences with respect to the large shock. Perceived educational returns and risk, economic preferences (“consumerism”) and social preferences (“individualism”) adapt quickly and are directly linked to changes in plans and outcomes. Cohorts closer to critical educational junctions at the time of Reunification, however, adjusted their plans to a much lesser extent. While they similarly updated the expected returns to education, they exhibited a slower adjustment in their preferences relative to younger cohorts.