Human capital investment under exit options: Evidence from a natural quasi-experiment

Abstract

Groups historically subject to discrimination, such as Jews, could exhibit high investment in education because discrimination spurred emigration—and emigration was facilitated by skill. If emigration is uncertain, the skill investment induced by discrimination could more-than-offset the mechanical reduction in skill stocks at the origin. That is, in theory, the exit option could raise skills at the origin net of departures. Tests of these theories are rare. We examine a natural quasi-experiment in the Republic of Fiji, where a sharp and unexpected rise in discriminatory policy by a dominant ethnic group caused both mass emigration and mass skill investment by the other major ethnic group. We find that the net effect on skills within Fiji was positive: the human capital of the discriminated group remaining in Fiji would have been lower if there had been no emigration option. We test a variety of alternative models for the net increase in skills and find that the emigration option was a necessary causal mechanism.