Revisiting Stacy Berg Dale and Alan B. Krueger on the Payoff to Attending a More Selective College

Recently, I’ve been struck by the interesting way in which Alan Krueger has been presenting research findings in the course of advancing President Obama’s domestic policy agenda. It brought to mind his 2002 paper (co-authored by Stacy Berg Dale) in the Quarterly Journal of Economics on the payoff to attending a more selective college, which received considerable attention at the time. The core conclusions from the paper read as follows:

Although most of the previous literature has implicitly assumed that the returns to attending a selective school are homogeneous across students, an important issue in interpreting our findings is that there may be heterogeneous returns to students for attending the same school. Some students may benefit more from attending a highly selective (or unselective) school than others. For example, a student intent on becoming an engineer is likely to have at least as high earnings by attending Pennsylvania State University as Williams College, since Williams does not have an engineering major. In this situation, if students are aware of their own potential returns from each school to which they are admitted, they could be expected to sort into schools based on their expected utility from attending that school, as in the Roy model of occupational choice. In other words, the students who chose to go to less selective schools may do so because they have higher returns from attending those schools (or because there are nonpecuniary benefits from attending those schools); however, the average students might not have a higher return from attending a less selective school over a more selective one. Nonetheless, contrary to the previous literature, this interpretation implies that attending a more selective school is not the income-maximizing choice for all students. Instead, students would maximize their returns by attending the school that offers the best fit for their particular abilities and desired future field of employment. [Emphasis added]

This is interesting and important, and it is easy to see why status-obsessed journalists found the paper fascinating. 

As friend points out, however, there is another dimension to this picture, i.e., the internal real rate of return, which the authors’ calculate on p. 1520. Because the difference in tuition between selective and less-selective schools wasn’t that great during the period studied, the IRR is incredibly high. This finding, however, drew relatively little attention:

Although the implied internal rates of return to investing in a more expensive college in Table VIII are high, one should recognize that the average cost of tuition has roughly doubled in real terms since the late 1970s, and the payoff to education increased in general since the late 1970s. The implicit internal real rate of return for the estimate in column 5 of Table VIII falls to 8 percent if tuition costs are doubled. Indeed, the supernormal return to investing in high-tuition education in the 1970s may explain why it was possible for colleges to raise tuition so much in the 1980s and 1990s.

The relevant consideration, of course, is the tuition gap between selective and less-selective schools. Tuition costs have been increasing across a wide range of schools, including less-selective schools. Demand for a certain kind of elite college experience has soared with rising affluence, and in particular with the expansion of the college-educated upper-middle-class. This, in turn, has allowed a number of schools that had been considered less-selective to become increasingly selective. We’ve also seen a positional arms race in which schools compete for scarce resources, like star faculty, and offer increasingly expensive amenities for students and staff. Given the tournament-like nature of compensation in some skilled professions, it is at least possible that the pecuniary benefits of attending a selective school relative to a non-selective school have actually increased rather than decreased.  

This conclusion, however, would have been less eye-catching. In fairness, I’m far more inclined to blame journalists for largely missing this possibility than SBD and ABK.