Stay in school or start working? — The human capital investment decision under uncertainty and irreversibility

At any moment a student may decide to leave school and enter the labor market, or to stay in the education system. The timing of their departure determines their level of academic achievement and formal qualification. Education is a multi-stage process of investing in an accumulative human capital stock. How long can I expect to go to school? How much will I invest in my education? To answer these questions we apply the real option approach. We depart from recent literature by (1) adding accumulated education costs and determining the expected time of market entry, (2) considering complete earnings profiles including entry-level wages, sheepskin effects and earning dynamics, and (3) discussing the option value of schooling while introducing potential career opportunities or threats of unemployment modeled as major uncertain events connected with particular formal education achievements.

► HC investment is a result of sequential decisions with an option value.
► Expected time of market entry and endogenous total costs are determined.
► Comparative statics for all relevant variables are discussed fully analytically.
► Complete income profiles of qualification levels and sheepskin effects are analyzed.
► Impact of large stochastic shocks of different formal qualifications is analyzed