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Economics%20116%20-%20Lecture%2010%20-%20Final

Economics%20116%20-%20Lecture%2010%20-%20Final - Economics...

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Economics 116:  Economic Development UC San Diego, Spring 2009 Prof. Karthik Muralidharan Department of Economics Lecture 10
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Administrative Stuff
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Lecture Outline (4/30/09) Human Capital Versus  Signaling/Screening  Public Intervention in Education Improving Education in Developing  Countries
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Returns to Education - Summary Highest for primary education, then for secondary, and then  for tertiary education.  Why? Diminishing  returns Increasing costs Highest at all levels for developing countries, then for middle  income countries, and then for developed countries.  Why? Relative lack of educated workers makes educated labor scarce and  increases the returns to education How do private returns compare with social returns?   Could go either way!  Why? Social return lower if you add public costs to private costs Social return higher if positive externalities and spillovers (which may  be a reason for public spending/subsidies in the first place) What are the limitations of the estimates presented above? Correlation versus causation Human capital versus Signaling
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5 Human Capital Vs. Signaling Human capital theory assumes that education adds value to  productive capacity - So more educated people earn more because they have more ‘skills’ Alternative possibility is that employers have imperfect  information on the ability of prospective employees - So they would like to offer high wages to high ability employees and low wages to  those with lower ability - But, they cannot easily tell who is of high and who is of low ability They do know however that higher ability individuals have a  lower cost of acquiring formal education - Hence, people choosing to acquire more education are more likely to be of  ‘higher ability’ – implying higher wages
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6 In this view of the world, employees are ‘signaling’ their higher  ability by acquiring more education and employers are  ‘screening’ for high-ability using education as the screening  device - Spence (1973) Think about cultures that place a very high value on rote  memorization of texts of limited direct relevance - Makes sense if you don’t care as much about ‘value addition’ as you do  about identifying those with the highest ability Also relevant for thinking about returns to attending “elite”  institutions of learning - How much of the high earnings of graduates are because these  institutions “add more value” as opposed to because employers  recognize that these institutions “select the best” The Signaling Theory of  Education
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7 Signaling Example
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