Uncertain educational returns in a developing economy Sandeep Mohapatra *, Martin K. Luckert Department of Resource Economics and Environmental Sociology, University of Alberta, Canada 1. Introduction The rate of return to education is a key economic parameter that has received attention from empirical researchers for decades (see Psacharopoulos and Patrinos, 2004 for a recent review). Estimates of educational returns are used to guage the level of educational expenditures undertaken by governments and individuals. For example, policymakers often use information on educational returns to assess the feasibility of student loan programs for funding higher education (OECD, 2007; Oliveira Martins et al., 2009). Perception by parents about the return to education influences their decisions regarding educating children, and educating boys versus girls (Gertler and Glewwe, 1992; Munshi and Rosenzweig, 2006). Returns to education are also important from a macroeconomic perspective since human capital accumu- lation is regarded as one of the prime movers of regional and country-level economic growth (Barro, 1991). Most studies on educational returns investigate mean values. In contrast to mean returns, the variance (henceforth uncertainty) associated with economic returns to education has received little attention (Patrinos et al., 2006). There is, however, a long standing theoretical literature emphasizing that when investing in human capital, individuals and governments are not only interested in returns, but also in the certainty of those returns (e.g. Levhari and Weiss, 1974). Understanding the uncertainty in educational returns is necessary for understanding both the incentives that individuals have to invest in education and the impacts of government policies that support increased investment in educa- tion. For example, if significant portions of the distributions of returns to education are negative, then risk averse individuals, and/ or governments averse to uncertain impacts of policies, may be hesitant to invest in education. Alternatively, if investments in human capital decrease the variance of wages, that is, if the uncertainty in educational returns is decreasing in education levels, then governments will have stronger incentives to nurture human capital accumulation due to its insurance effect, either as a substitute for, or in combination with social protection polices (Anderberg and Andersson, 2003). In recent years a number of studies in labor economics, with a focus on developed economies, are increasingly paying attention to the magnitude of uncertainty present in educational returns. Many empirical papers confirm that educational returns exhibit signifi- cant variability across individuals (e.g. Koop and Tobias, 2004). Others show that the amount of variability present in educational returns may evolve over time as governments expand the total quantity of education in an economy (Harmon et al., 2003). Uncertainty can increase, for example, if an education expansion draws less able people into the educated pool. Implications of uncertainty in eductional returns for wage inequality, and the possibility that sizeable fractions of the population may face negative returns, have also been explored (Maier et al., 2004; Lauer, 2004). One strand of the uncertainty literature focuses on understand- ing what drives the enrollment rates of women in higher educational institutions in developed countries (e.g. Averett and Burton, 1996; Jacob, 2002; Anderson, 2002). Using theoretical models of lifetime earnings, studies show that a female college wage premium and women’s expectations of future earnings are the major drivers of women’s college enrollment (He, 2011). The logic behind these models is that individuals make their college entry decisions by comparing the expected difference in the average discounted wages from two future wage distributions, International Journal of Educational Development 32 (2012) 590–599 ARTICLE INFO Keywords: Education Development Gender Rate of return Distribution Random parameters ABSTRACT This paper estimates the distribution of educational returns by gender for India. While previous studies focus on mean returns, the variance of educational returns has important implications for policy-making and micro-level decision making with respect to education. If the variance of educational returns is large, it can leave large sections of the population with negative returns; if the variance of educational returns is gender specific, it can influence households’ decisions to educate girls versus boys. Our econometric results provide evidence that India’s labor markets are characterized by significant uncertainty and that the uncertainty is systematically larger for women. ß 2011 Elsevier Ltd. All rights reserved. * Corresponding author at: 515 General Services Building, Department of Resource Economics and Environmental Sociology, University of Alberta, Edmon- ton, AB, T6G 2H1, Canada. Tel.: +1 780 492 0823. E-mail address: Sandeep.mohapatra@ualberta.ca (S. Mohapatra). Contents lists available at SciVerse ScienceDirect International Journal of Educational Development journal homepage: www.elsevier.com/locate/ijedudev 0738-0593/$ – see front matter ß 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.ijedudev.2011.11.009