American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Opportunity Unraveled: Private Information and the Missing Markets for Financing Human Capital
American Economic Review
vol. 114,
no. 7, July 2024
(pp. 2024–72)
Abstract
We examine whether adverse selection has unraveled private markets for equity and state-contingent debt contracts for financing higher education. Using survey data on beliefs, we show a typical college-goer would have to repay $1.64 in present value for every $1 of financing to overcome adverse selection in an equity market. We find that risk-averse college-goers are not willing to accept these terms, so markets unravel. We discuss why moral hazard, biased beliefs, and outside credit options are less likely to explain the absence of these markets. We quantify the welfare gains for subsidizing equity-like contracts that mitigate college-going risks.Citation
Herbst, Daniel, and Nathaniel Hendren. 2024. "Opportunity Unraveled: Private Information and the Missing Markets for Financing Human Capital." American Economic Review, 114 (7): 2024–72. DOI: 10.1257/aer.20211653Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- I22 Educational Finance; Financial Aid
- I23 Higher Education; Research Institutions
- I26 Returns to Education
- J24 Human Capital; Skills; Occupational Choice; Labor Productivity