THE DEMAND FOR AND RETURN TO EDUCATION WHEN EDUCATION OUTCOMES ARE UNCERTAIN

This article treats education as a sequential choice that is made unde r uncertainty. A simple model is used to explore the effects of abilit y, high school preparation, preferences for schooling, the borrowing r ate, and ex post payoffs to college on the probability of various post -secondary college outcomes and the ex ante return to starting college . The model motivates an empirical method of accounting for uncertaint y about educational outcomes and for nonlinearity in the relationship between years of education and earnings when estimating the expected r eturn to the first year of college.