Belief Formation of the Returns to Schooling and How to De-Bias Incorrect Beliefs

Project Active from to Firms and Entrepreneurship

This study investigates how poor households in rural and urban Rajasthan form beliefs about the value of additional years of schooling.  Previous studies have documented that poor populations in developing nations hold downwardly biased beliefs of the returns to schooling; they do not think schooling is as valuable as it actually is.[1]  Further, it has been shown that providing correct beliefs about average wages for adults with high levels of schooling can significantly and substantially increase schooling attainment.  This project aims to understand how such interventions can be made more effective by understanding the source of the original bias.

Using a survey with 402 households in the Ajmer district of Rajasthan, India, we are able to gain some preliminary insights into the complicated process of subjective belief formation about the returns to schooling.  In our sample, under our survey protocol, respondents show quite accurate beliefs of the relation between schooling attainment and wages (wages conditional on finding work) in the general population.  However, they greatly underestimate the probability of working, especially for the highly educated.  Though further work needs to be done, this provides an interesting explanation for downwardly biased beliefs of the returns to schooling – a failure to recognize (or incorporate) the increase in the probability of working.  We also provide suggestive evidence that (i) our population overestimates the relation between schooling and happiness (which we estimate to be significantly positive for both own education and spouse’s education), and (ii) people use different categories of data (e.g. types of jobs, people they know, types of skills) when formulating beliefs of for different levels of schooling.

[1] Jensen, Robert. “The (Perceived) Returns to Education and the Demand for Schooling.” Quarterly Journal of Economics, May 2010.