Hoxby vs. Dale-Krueger on the Selectivity Premium
By Bryan Caplan
People who attend more selective colleges make more money after graduation. But students impressive enough to win admission to selective colleges probably would have been relatively successful even if they’d attended a less prestigious institution. That’s ability bias for you. So how much of the observed selectivity premium is causal?
There’s a sizable literature on the topic, but the single most famous paper is Dale and Krueger’s 2002 QJE piece, “Estimating the Payoff to Attending a More Selective College.” (summaries here and here) While delving into this literature, I came across a harsh critique of Dale-Krueger in Caroline Hoxby’s survey article on the topic:
Finally, Dale and Krueger (2002) compute lower rates of return but their estimates are based on an identification strategy that is much less credible. They compare students who gained admission to approximately the same menu of colleges. They compare the earnings of those who, from within the same menu, chose a much more-selective college and a much less-selective college. However, since at least 90 percent of students who have the same menu similarly choose the more-selective college (s) within it, the strategy generates estimates that rely entirely on the small share of students who make what is a very odd choice. These are students who know that they could choose a much more-selective college and who have already expressed interest in a much more-selective college (they applied), yet, they choose differently than 9 out of 10 students. Almost certainly, these odd students are characterized by omitted variables that affect both their college decision and their later life outcomes.
Soon afterwards, though, I learned that Dale and Krueger’s 2011 working paper directly replies to Hoxby:
Hoxby (2009) mistakenly reports that only 10 percent of students in the C&B sample used in Dale and Krueger (2002) did not attend the most selective college to which they were admitted. However, similar to the results for the sample used here, the correct figure is 38 percent.
Finally, it is possible that our estimates are affected by students sorting into the colleges they attended from their set of options based on their unobserved earnings potential. About 35 percent of the students in each cohort in our sample did not attend the most selective school to which they were admitted. Our analysis indicates that students who were more likely to attend the most selective school to which they were admitted had observable characteristics that are associated with higher earnings potential. If unobserved characteristics bear a similar relationship to college choice, then our already-small estimates of the payoff from attending a selective college would be biased upward.
Several people I know thought the 2002 Dale-Krueger paper oversold its results; while some measures of selectivity didn’t pay, others did. The new paper, though, is almost unequivocal: Once you correct for pre-existing ambition, its hard to find any measure of selectivity that pays.
Overall, the evidence for a financial payoff of selectivity is a lot weaker than I expected. This finding is admittedly puzzling from a signaling point of view, because it seems like more selective educations send a stronger message to the labor market. But the finding is equally puzzling from a human capital point of view, because it seems like more selective educations do more to hone students’ skills. Hmm.