Springer-Verlag Berlin Heidelberg GmbH

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1 Springer-Verlag Berlin Heidelberg GmbH

2 Kazuhiro Arai The Economics of Education An Analysis of College-Going Behavior With 18 Figures Springer

3 Kazuhiro Arai Professor of Economics Hitotsubashi University Kunitachi, Tokyo, Japan This English Translation is based on the Japanese original, Kazuhiro, Arai; Kyoiku-no-Keizaigaku (The Economics of Education) Published by Yuhikaku Publishing Company 1995 Kazuhiro Arai ISBN ISBN (ebook) DOI / Printed on acid-free paper Kazuhiro Arai 1998 Originally published by Springer-Verlag Tokyo Berlin Heidelberg New York in 1998 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in other ways, and storage in data banks. The use of registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Typesetting: Best -set Typesetter Ltd., Hong Kong SPIN:

4 To Lisa, Hiro, and Mayumi

5 Preface Why do some go to college while others do not? Why have the percentages of various types of students going to college changed so dramatically throughout the world over the last few decades? The purpose of this book is to consider questions of this kind from an economics viewpoint. These are by no means simple questions and require accurate theoretical investigations and extensive empirical analyses to throw light on them. The questions to be considered in this book are the main focus of a field of study called "the economics of education." Although this subdiscipline of economics is not well known, it is one of the most popular research fields in the world today. Almost 40 years have passed since education became an object of serious research by economists, and in this period Theodore W. Schultz and Gary S. Becker received a Nobel prize for their research relat~d to the economics of education. Kenneth J. Arrow, who likewise received a Nobel prize, also made an important contribution to the economics of education. Further, such prominent economists as Jacob Mincer, Michael Spence, and Joseph E. Stiglitz significantly advanced analyses in this field. Many other economists have also contributed to advances in this area, so that the economics of education is now one of the fields where the most interesting arguments are under way. In addition, because education can potentially determine the rise and fall of a state or nation, understanding it more fully surely serves a greater purpose than that of merely satisfying a thirst for knowledge. Although the author has sought to make original contributions to this field in almost every chapter, he has tried to give this book two fundamental characteristics. First, elucidation is provided so that the reader can gain a multi-dimensional and comprehensive understanding of major issues related to college-going behavior. By emphasizing both theoretical and empirical analyses, this book discusses a variety of views and analytical results. The author has tried to systematize and synthesize these research results as much as possible. One of the features of this book is that most chapters give serious consideration to cases of capital market imperfection, or present arguments with this imperfection in mind. Because capital markets are imperfect in most real economies, using the assumption of capital market perfection often leads to arguments which do not offer a good explanation of reality. This book has tried to overcome this problem as much as possible. The second characteristic is that clarification is given so that even those who have little knowledge of economics or econometrics can understand this book, although its content is quite up-to-date. Hence, even specialists of pedagogy, sociology, and other social sciences can also easily understand it. Appendices on economics and econometrics are included for readers who have insufficient knowledge of these disciplines. VII

6 VIII Preface Further, since all economics terms used in this book are defined when they first appear or in attached notes, technical terms need not prevent readers from understanding the content. The subject index might also be useful for understanding definitions. Three sections (3.5, 3.6 and 4.2) have asterisks in their headings to indicate that the contents are technical in nature and can be skipped without reducing overall understanding. The prerequisite for understanding this book is only elementary high-school mathematics. Even those without such knowledge will probably have little difficulty understanding most parts. Only Sect. 3.6 uses college-level mathematics, but it is one of the above three sections with an asterisk. Although this book cites articles mainly from international journals as well as books, some cited studies and the empirical studies undertaken by the author himself are on Japan. Thus, readers will be able to gain some knowledge of Japanese higher education, facts about which have not been very well known internationally. In this sense, this book may be able to introduce aspects of Japanese education to the world. This book will enable many readers, especially those whose majors are not economics, to understand first of all how economics explains college-going behavior. Those whose majors are economics can use it as a book on applied microeconomics or to examine empirical analyses that have been undertaken so far in this field. Many readers may realize that higher education and college-going behavior contain very interesting economic problems. They might also notice that many problems are still unresolved. It would give the author great pleasure if this book inspi!ed a deeper interest on the part of readers in the economics of education. This book is based on a book by the same author published in Japanese in However, some revisions have been made mainly to facilitate understanding by those who are unfamiliar with Japanese education. In particular, one appendix has been added to provide readers with basic knowledge of the Japanese education system. In the process of writing this English version, the author was assisted by Hisami Anzai, Anne Heynes, and Harumi Seta, to whom he would like to extend his thanks. He would also like to acknowledge a grant-in-aid for publication of scientific research results provided by the Ministry of Education, Science, Sport, and Culture of Japan. Kazuhiro Arai

7 Contents Preface vn Chapter 1 Basic Facts and the Purposes of This Book 1.1 Variations in the Percentage of Students Going to College International Comparisons The Questions to be Answered and a Summary of Each Chapter o Notes o o o 0 0 o o o o o 0 o o 0 6 o o o o o o o 0 o o o o o o o 0 o o o o o o 0 o o o o o o o 0 0 o 0 10 Chapter 2 College-Going Behavior as Investment in Human Capital 2o1 The Concept of Human Capital 0 f 2ol.l Investment in Human Capital 0 2ol.2 The Costs of Higher Education Investment o The Benefits of Higher Education Investment 0 2ol.4 The External Economies of Higher Education o A Summary of Private Costs and Benefits Basic Theories of College-Going Decision Making The Rate of Interest and Present Value The Present-Value Method and the Internal-Rateof-Return Method Capital Market Imperfection How to Apply the Internal-Rate-of-Return Method How to Measure Internal Rates of Return Biases in Measuring Internal Rates of Return 0 2o3o2o1 Downward Biases Upward Biases o 2o3o3 Problems with Human Capital Theory Mincer's Earnings Function and Rates of Return Basic Theory Measuring Rates of Return 0 2o5 General Properties of Rates of Return Development Stages and Rates of Return 0 2o5o2 Changes in Rates of Return Over Time 0 Notes o o 0 0 o o 0 0 o o o o o o 0 o o o 0 o o o o o o o o o o o o o o o o o o o 0 o 0 11 o o o 0 o o o o o o o o o o o o 0 o o 0 o o o o o o o o o o 0 o o o 0 o 0 0 o o o o o o 0 o o o 0 o o o o o o o 0 o o 0 0 o o o o o o 0 o o o o 0 0 o o 0 o o 0 0 o o 0 o o o o 0 0 o o o o 0 0 o o o o o o o Chapter 3 College-Going Behavior as Signaling 301 Preliminary Considerations 0 3ol.l Basic Questions 0 3ol.2 Assumptions o o o o IX

8 X Contents 3.2 The Spence Model Derivation of the Signaling Equilibrium Properties of the Signaling Equilibrium Signaling Equilibria under Capital Market Imperfection Parents' Wealth and Signaling Costs Signaling Wealthiness Signaling Worker Traits The Education Signal and Potlatch Statistical Discrimination The Arrow-Burdett Model Combining Signaling and Human Capital Models Notes Chapter 4 An Application of the Internal-Rate-of-Return Method: Rates of Return to Medical and Dental Education 4.1 The Supply of Physicians and Dentists Why the Numbers of Physicians and Dentists are Regulated Marginal Valuation of a Physician Internal Rate of Return and Optimality A Different View on the Optimal Numbers of Physicians and Dentists Costs ,1 Returns Evaluation of the Measured Rates of Return Computation Results of the Internal Rates of Return Discussion Notes... ; Chapter 5 Causes of Changes in the Enrollment Rate 5.1 Internal Rate of Return and Enrollment Rate Changes in the Rate of Return Relationship Between Rate of Return and Enrollment Rate Capital Market Imperfection and the Enrollment Rate Models That Do Not Use Rates of Return Testing Models That Do Not Use the Rate of Return Factors Generating Changes in the Enrollment Rate Enrollment Rate and Application Rate Application Models Differences Between Application Models and Enrollment Models Notes Chapter 6 Individual Attributes and College-Going Behavior 6.1 Enrollment Rates in the Prefectures Hypotheses, Independent Variables, and Data Testing the Hypotheses Effects of Parents' Educational Background

9 Contents XI Results of Several Empirical Studies Economic Development and Effects of Parents' Educational Background Sex Differences in College-Going Behavior Notes Chapter 7 The Purpose and Function of Higher Education 7.1 Human Capital Theory Versus Signaling Theory Basic Problems Several Statistical Tests Decline in the Enrollment Age Population and the Purpose and Function of Higher Education Notes Appendix A Appendix B Appendix C References Author Index Subject Index