High Rates of Return on College Education Comes with High...

Attending college has been considered one of the most protable investments, annualized returns ranging from 8% to 13% (Card 1999). I utilize a simple approach, as in Mehra and Prescott (1985), to quantify how much of the excess return to college is explained by its risk. I also explore the role played by heterogeneous ability by developing a life-cycle model with endogenous enrollment and analyzing the dropout risk effect on college returns. Under the risk premium approach, the permanent inc...