Rodriguez 2016

Rodríguez, Urzúa, and Reyes 1
Heterogeneous Economic Returns to Postsecondary Degrees:

Evidence from Chile1
Jorge Rodríguez
Sergio Urzúa
Loreto Reyes
Abstract
We analyze the economic returns to postsecondary degrees in Chile. We posit a schooling
decision model with unobserved ability, degree-specific tuition costs, and earnings. We use
administrative records to carry out our empirical analysis. Our results show positive average
returns to postsecondary education, especially for five-year degrees. However, we also uncover
significant heterogeneity. We document how unobserved characteristics (ability) determine the
economic benefits of first- and second-best choices, even leading to negative returns to
postsecondary degrees. Our findings illustrate the importance of allowing for heterogeneous
treatment effects and individual’s choices when examining the returns to education.
Jorge Rodríguez (jorger@uchicago.edu) is a PhD student in economics at the University of Chicago. Sergio Urzúa
(urzua@econ.umd.edu) is an associate professor of economics at University of Maryland. Loreto Reyes
(loreto.reyesr@gmail.com) is an advisor at the Ministry of Finance. We are indebted to the useful comments of three
anonymous referees, Samuel Berlinksy, Matias Busso, Judy Hellerstein, Giordano Palloni, Ricardo Mayer, Rodrigo
Montero, Claudia Sanhueza, Miguel Sarzosa, Ken Ueda, and the seminar participants at Universidad Diego Portales
(January, 2012) and IADB (March, 2012). A previous version of this paper circulated under the title “The Economic
Returns to Postsecondary Degrees in Chile.” We thank the Ministry of Finance of Chile for providing us access to
the data. The authors did not have access to information leading to the identification of individuals. The data
analysis was carried out in a secure server. Sergio Urzúa thanks the support of Centro de Microdatos at the
University of Chile through the Millennium Science Initiative sponsored by the Chilean Ministry of Economics,
Development and Tourism, Project NS100041.
doi:10.3368/jhr.51.2.0213-5474R1
I. Introduction
The vast evidence suggesting average positive returns to postsecondary education has
contributed to the rapid worldwide expansion of the higher education sector.1 However, concerns
about the weak labor market performance of recent college graduates in developed and
developing countries, uncertainty about the quality of institutions of higher education, the
climbing tuition costs, and the accumulation of large student debts are challenging the
presumption that a postsecondary degree confers financial security.2 In this paper, we analyze
this phenomenon by estimating heterogeneous treatment effects across postsecondary degrees
using data from Chile. Our intuition is simple: investing in higher education can deliver positive
average returns, while still yielding a negative economic return for many individuals.
We study Chile’s highly competitive postsecondary education system. The country is
particularly interesting because its schooling system has been regarded as a success. However,
over the past few years the system has received multiple criticisms. Many of them also apply to
the postsecondary educational systems in developed and other developing countries.
This paper contributes to the empirical literature analyzing the returns to education in the
context of models with unobserved heterogeneity (Willis and Rosen 1979; Card 1995 and 2001;
Kane and Rouse 1995; Taber 2001; Heckman, Urzúa, and Vytlacil 2006; Carneiro, Heckman,
and Vytlacil 2011), as well as to the research examining schooling choices in complex settings
(Kane 1996 and 1999; Keane and Wolpin 1997; Cameron and Heckman 1998 and 2001).
While a few prior studies have analyzed the economic returns to tertiary education in
developing countries, our approach represents an improvement from previous work in three
critical dimensions.3 First, we explicitly model the schooling decision of high school graduates
over all available educational alternatives: high school diploma and different postsecondary
degrees (two-, four- and five-year degrees). We assume individuals decide using an unordered
discrete choice model. Second, our model allows for the presence of unobserved heterogeneity,
which is interpreted as latent ability. More precisely, we assume that schooling decisions depend
on individual’s observed characteristics and latent ability (Heckman, Stixrud, and Urzúa 2006;
Urzúa 2008). Without imposing a full set of assumptions –as in a full “structural” approach –,
our empirical model allows observationally equivalent individuals to face different returns to
education depending on their unobserved endowments. Third, our results show the importance of
understanding the structure of the economic agent’s schooling decision process when
determining the returns to education (Card 2001; Heckman, Lochner, and Todd 2006; Heckman,
Urzúa, and Vytlacil 2008). In particular, we examine two different definitions of the return to
postsecondary degrees while taking into account the structure of the underlying schooling choice
model. First, we estimate and compare the economic benefits to each postsecondary degree
versus the alternative of not pursuing postsecondary studies (high school diploma). Additionally,
we exploit the structure of our schooling choice model to compute the returns to each type of
degree for those who optimally chose it (first-best option) versus their second-best alternative.
The empirical strategy is implemented with longitudinal data containing administrative
records from several sources of information. Our initial sample consists of the universe of
graduates from higher education institutions in Chile in 2008. We integrate this data with
information from the national college admission system (2001-2007), a rich database that
includes college admission test scores and individual demographic and socioeconomic variables.
Finally, we observe each student’s labor market outcomes for the years 2009 to 2013 using
administrative registers of earnings.
Our model’s estimates allow us to simulate counterfactual choices and labor market
outcomes. Specifically, we compute individual’s ex-ante economic benefits using the average
annual earnings for the period 2009-2013 as well as the (net) present value of earnings associated
to each choice, which incorporates tuition costs and lengths of degrees. We find that individuals
with higher latent ability are more likely to enroll in institutions offering five-year degrees,
followed by four-, two-year degrees and a high school diploma, although, the distributions of
unobserved ability for these last three schooling choices do not differ by much.
We also use our model to carry out policy simulations. In particular, we analyze the
effects of a reduction in postsecondary tuition costs. We find that large reductions in all tuition
costs has minimal impact on the overall postsecondary graduation rate, but produces important
composition effects within postsecondary degrees choices. This confirms the importance of
allowing for heterogeneity across degrees.
We document substantial heterogeneity in the economic returns to postsecondary
degrees. When we compare schooling choices against the alternative of choosing only high
school, we find that the average economic returns to five-year postsecondary degrees are the
highest among all alternatives. Furthermore, our findings indicate that, in general, conditional on
the type of degree, individuals endowed with larger stocks of unobserved ability obtain higher
economic returns relative to lower ability individuals. However, when we construct our
estimated treatment effects based on first-versus second-best alternatives, we find a significant
fraction of individuals facing negative returns. In particular, we estimate that 31 percent of those
obtaining five-year college degrees would have received higher earnings (five years after
graduation) if they had selected the second-best alternative. The percentage rises to 37 percent
when analyzing net present value of earnings. Our estimated average treatment effect based on
second-best choices for five-year degree graduates is decreasing with the level of skills, because
the economic benefit of second-best choices rises faster than those of the five-year degree.
Our findings must be interpreted as a first step towards a better understanding of the
returns to postsecondary degrees, not only in Chile but, more generally, in countries expanding
higher education systems. By focusing on types of degrees, we highlight the challenges of
defining and estimating their economic values. These have important implications for the
ongoing and future research examining the returns to specific careers, fields or disciplines in
complex settings.
The rest of this paper is organized as follows: Section II describes the main features of
the Chilean postsecondary education system. Section III describes our economic model and
empirical strategy and presents a detailed analysis of our data. This section also defines the
treatment effects of interest. Section IV discusses the main empirical findings. Finally, section V
concludes.
II. The Postsecondary Education System in Chile
Chile’s postsecondary education system experienced a rapid development over the last
thirty years. The drastic changes began in 1981 with a reform that stimulated the entry of private
institutions to the system. As a result, the country transitioned from a postsecondary educational
system dominated by public providers to one driven by competition between public and private
institutions. The reform also increased the range of available postsecondary degrees. Before
1981, the vast majority of college graduates obtained five-year college degrees. After 1981,
postsecondary institutions started offering two- and four-year degrees. The institutions offering
two-year postsecondary degrees are known as Technical Institutes (TI) (Centros de Formación
Técnica), those offering four-year postsecondary degrees are known as Professional Institutes
(PI) (Institutos Profesionales), while universities continue offering five-year college degrees.4 In
this paper we examine the economic returns to each of these alternatives.5
More than three decades after the original reform, Chile’s postsecondary system is under
scrutiny (OECD, 2009). Excessive tuition costs fueled an intense public debate, with many
groups advocating for more generous tuition subsidies.6 At the same time, the quality of many
higher education institutions has been questioned. Moreover, the system is characterized by
serious information problems. Until recently, students did not have information on the
employment prospects associated with different careers and postsecondary institutions when
deciding whether and when to enroll. As a result of this lack of information, nothing prevented
students (and their families) from making poorly informed financing decisions, which could lead
to non-optimal outcomes from public and private perspectives. Our findings are consistent with
this intuition. Importantly, many of these criticisms apply to the postsecondary schooling
systems in other developed and developing countries.
In Chile, access to postsecondary education is merit-based. Students who wish to attend
college must take a national college admission test known as the PSU (Prueba de Selección
Universitaria). Conditional on their PSU scores, high school graduates choose between enrolling
in a postsecondary institution or entering directly into the labor market. Each tertiary institution
sets a minimum score requirement for enrollment with many just requiring having taken the
college admission exam.7,8
This process produces positive sorting between academic results, as measured by PSU
scores, and enrollment by type of degree. Table 1 shows the proportion of students in different
categories of PSU (quintiles), family gross income and mother’s years of education across
degrees. Most of the students with relatively high PSU scores have high unconditional
probabilities of graduating from institutions offering five-year degrees. Nonetheless, for any
given quintile, we observe individuals obtaining two-, four- and five-year degrees. Thus, even
though access to postsecondary education is merit-based, in practice low-PSU scores do not
prevent students from enrolling and eventually graduating from universities. Figure 1 confirms
this finding. It presents the distribution of postsecondary degrees by PSU score percentiles. Even
for the lowest percentiles we observe individuals obtaining two-, four-, and five-year
postsecondary degrees. As we discuss below, this has important implications for our theoretical
framework.9
The sorting profile is also strongly influenced by students’ socioeconomic background.
As Table 1 documents, over 70 percent of the students whose gross family income is higher than
2,800 dollars per month (average family income in 2008) obtain five-year degrees. Students with
more educated mothers are also more likely to obtain five-year degrees.
Additionally, there are significant differences in the labor market performance across
postsecondary degrees. Figure 2 analyzes administrative information on earnings by type of
degree for the period 2009-2013. Each number corresponds to the average monthly earnings
observed among high school and college degree holders after graduation (2008). The average
earnings premium of having a five-year degree (with respect to high school diploma) is the
highest among all postsecondary alternatives, followed by the premia to four- and two-year
degrees. These results are confirmed in Table 2, which presents OLS estimates from different
Mincer-type regressions. More precisely, the table presents the estimated parameters from the
following regression model:
(1) ln 𝑤𝑖 = 𝑋𝑖′ 𝛽 + 𝑇𝑖 ′ 𝛿 + ∑ 𝛾𝑠 𝐷𝑖,𝑠 + 𝑢𝑖

𝑠∈𝒥
where 𝑤𝑖 represents average annual earnings for the period 2009-2013, 𝑋𝑖 contains
demographic and socio-economic controls (gender, age, mother’s education, family income), 𝑇𝑖
is a vector of pre-labor market skills proxied by college admission test scores, 𝐷𝑖,𝑠 is a binary
indicator taking a value of one if the individual reports 𝑠 as her postsecondary degree, and zero
otherwise; 𝒥 is the set of all available degrees, and 𝑢𝑖 is the error term. The information on
postsecondary degrees (2008) and annual earnings come from the Chilean postsecondary
schooling system and the unemployment insurance system, respectively. We describe our data in
more detail in section III.E.10
After accounting for individual characteristics, five-year degree universities exhibit the
highest Mincerian return: 1.063 (first column in Table 2). The estimated returns remain stable
even after controlling for family background characteristics (columns 2 and 3). When we add
measures of academic performance as controls (college admission tests and high school GPA),
the estimated returns decrease, but five-year degrees still exhibit the highest return among
degrees (columns 4 and 5).
However, to interpret these estimates as the causal effects of postsecondary degrees on
earnings, we would need to impose strong assumptions. In particular, we would have to assume
that selection is based exclusively on observed characteristics: conditional on observed test
scores 𝑇𝑖 and 𝑋𝑖 , the set of dummy variables {𝐷𝑖,𝑠 }𝑠∈𝒥 is independent from 𝑢𝑖 . Cameron and
Heckman (2001) and Hansen, Heckman, and Mullen (2004) provide evidence that selection
based on both observed and unobserved heterogeneity plays a critical role in schooling choice
models. Heckman, Stixrud, and Urzúa (2006), on the other hand, documents that labor market
outcomes are also determined by unobserved variables, namely latent ability. Therefore, to the
extent that observed test scores are not perfect proxies for latent ability, we cannot provide a
causal interpretation to the results in Table 2. Furthermore, these results do not account for the
direct and indirect costs of education, which make it hard to interpret the OLS estimates as rates
of returns.11 As Table 3 shows, tuition costs can be substantial. Consequently, we follow a
different strategy in which we explicitly model schooling choices as a function of observed and
unobserved characteristics, and compute the returns to postsecondary degrees net of tuition costs.
III. The Economic Model and Empirical Strategy
In this section, we posit a model of unordered schooling decisions. Conditional on her
characteristics, agents make decisions based on the comparison of the utility levels associated
with each degree.12 In turn, this utility might depend on the potential economic benefits as well
as monetary and psychic costs.
We supplement this framework with a model of labor market outcomes (earnings) by
type of degree. We assume that these outcomes are determined by the agent’s observed and
unobserved characteristics. Unobserved components, which we interpret as latent ability,
generate a correlation between schooling choices and individual labor market outcomes. This
delivers the possibility of essential heterogeneity, which allows for observationally equivalent
individuals to experience different treatment effects (Heckman, Urzúa, and Vytlacil 2006). We
estimate a variety of treatment effects and examine whether and how they change with the level
of unobserved ability.
A. The Multinomial Choice Model
After graduating from high school, individuals decide between enrolling in one of the
available higher education institutions, each leading to a specific degree, or entering the labor
market. Let 𝒥 denote the set of all choices, and 𝑗 be a specific postsecondary degree type, that is,
𝑗 ∈ 𝒥, where 𝑗 = 0 indicates the alternative of a high school diploma.13 Degree choices depend
on observed and unobserved characteristics. Let 𝜃𝑖 denote the unobserved individual endowment
(latent ability).14
Let 𝑉𝑖𝑗 be the utility for individual 𝑖 of choosing option 𝑗 ∈ 𝒥. This variable incorporates
the economic returns as well as monetary and psychic costs for each alternative. We approximate
𝑉𝑖𝑗 using the following linear functional form (for simplicity, we suppress the 𝑖 index):
′
(2) 𝑉𝑗 = 𝑋𝑗𝑉 𝛽𝑗𝑉 + 𝛼𝑗 𝜃 + 𝜈𝑗𝑉 ,
where 𝑋𝑗 represents the vector of exogenous characteristics and 𝜈𝑗𝑉 is the error term. We assume
that 𝜃 and 𝜈𝑗𝑉 are independent across individuals for all 𝑗 ∈ 𝒥. In addition, we assume 𝜈𝑗𝑉 is
independent of 𝜈𝑘𝑉 with 𝑗, 𝑘 ∈ 𝒥 and 𝑗 ≠ 𝑘.
Equation (2) can be interpreted as a reduced-form approximation of the individual’s value
function that is generated from a dynamic model of schooling choices and labor market
outcomes. In this sense, our approach cannot be considered “structural,” as the economic
environment of the agent is not fully specified.15 However, we can use our model to identify a
well-posed economic parameter (Heckman 2010). The advantage of our empirical model is that
we are able to recover the full distribution of counterfactuals without invoking strong functional
form assumptions.16
Conditional on individual characteristics, degree choices are unordered. More precisely,
agents choose the alternative that yields the highest utility:
𝑗 ∗ = argmax {𝑉𝑘 }.
𝑘∈𝒥
Likewise, given 𝑗 ∗ , we can use our model to identify the second-best alternative 𝑙 ∗ as
𝑙 ∗ = arg max ∗ {𝑉𝑘 },

𝑘∈𝒥|−𝑗
where 𝒥| − 𝑗 ∗ denotes the set of options after excluding 𝑗 ∗ . Bellow we investigate the
consequences of this setup in the definition and estimation of the returns to education.
Let 𝐷𝑗 denote an indicator function for option 𝑗 ∈ 𝒥 defined as:
1 if 𝑗 = argmax {𝑉𝑘 }
𝐷𝑗 = { 𝑘∈𝒥
0 otherwise.
We utilize 𝐷𝑗 to define the treatment effects of postsecondary degrees. Finally, we
assume that agents graduate from high school at 𝑡 = 0, and that each postsecondary degree has a
specific duration, 𝑆𝑗 with 𝑗 ∈ 𝒥. For “not continuing on to postsecondary education,” our baseline
alternative (𝑗 = 0), we assume 𝑆0 = 0, whereas 𝑆𝑗 > 0 for the other options.
B. Labor Market Outcomes
Let 𝑦𝑗 (𝑆𝑗 ) denote annual initial earnings after obtaining a degree of type 𝑗 ∈ 𝒥. We
characterize the associated individual-level earnings profile as
𝑦𝑗 (𝑡) = 0 for 0 < 𝑡 ≤ 𝑆𝑗 , and
𝑦𝑗 (𝑡) ≥ 0 for 𝑆𝑗 < 𝑡 ≤ 𝑇,
where T is the retirement period (common to all individuals).
As in the case of the schooling choice model, labor market outcomes are determined by
observed characteristics as well as unobserved ability as follows:

′
(3) 𝑦𝑗 (𝑆𝑗 + 𝜏) = 𝑋𝑗𝑦 𝛽𝑗,𝜏
𝑦 𝑦 𝑦
+ 𝛼𝑗,𝜏 𝜃 + 𝜈𝑗,𝜏 with 𝜏 > 0 and 𝑗 ∈ 𝒥,
𝑦 𝑦
where 𝑋𝑗 represent a vectors of exogenous control variables and 𝜈𝑗,𝜏 is the associated error term,
which is assumed to be uncorrelated with observed and unobserved characteristics. Equation (3)
describes the data generating process for earnings, a critical component behind our estimated
economic returns to postsecondary degrees.
𝑦′ 𝑦 𝑦
In this context, ex-ante earnings, 𝐸[𝑦𝑗 (𝑆𝑗 + 𝜏) ∣ Ω], equal 𝑋𝑗 𝛽𝑗,𝜏 + 𝛼𝑗,𝜏 𝜃, where Ω
denotes the information set available to the individual at the time the decision is made. It
includes observed and unobserved variables as well as the structure of the model.17
Note that 𝜃 affects labor market productivity as well as degree choices. This unobserved
factor is what drives the endogeneity of decisions in our model. Specifically, for our empirical
𝑦
implementation, we assume that conditional on observed variables (𝑋𝑗𝑉 , 𝑋𝑗,𝑡 ) and 𝜃, 𝜈𝑗𝑉 ⊥ 𝜈𝑘𝑉 for
𝑦 𝑦 𝑦
𝑗 ≠ 𝑘, 𝜈𝑗,𝑡 ⊥ 𝜈𝑘,𝑠 for 𝑗 ≠ 𝑘 and 𝑡, 𝑠 > 0, and 𝜈𝑗,𝑡 ⊥ 𝜈𝑠𝑉 for any 𝑗, 𝑠 ∈ 𝒥 and 𝑡 > 0. Unobserved
ability generates the correlation between unobserved components of choices and labor market
outcomes.18
Finally, we use a conventional switching regression framework to define observed
earnings 𝑦(𝑆𝑗 + 𝜏):
𝑦(𝑆𝑗 + 𝜏) = ∑ 𝐷𝑗 × 𝑦𝑗 (𝑆𝑗 + 𝜏) 𝜏 > 0.

𝑗∈𝒥
C. Measurement System for Unobserved Endowment
The identification of the model of degree choices and counterfactual labor market
outcomes hinges on the identification of the distribution of unobserved ability 𝜃, 𝑓𝜃 (∙). We
follow the strategy in Carneiro, Hansen, and Heckman (2003) and Hansen, Heckman, and
Mullen (2004), and estimate this distribution using the information from a set of measurements
(test scores), which depends on individual’s observed characteristics and latent ability.
Let 𝑻 be a vector of individual-level test scores of dimension 𝑑 𝑇 , observed before the
agent faces the postsecondary education decision problem. We assume a system of linear
equations of the form:
(4) 𝑻 = 𝑿𝑻 𝛽 𝑇 + 𝜃𝛼 𝑇 + 𝜈 𝑇 ,
where 𝑿𝑻 represents a vector of exogenous controls, and 𝜈 𝑇 is the vector of residuals that is
independent between each other and the rest of the error terms in the model. Note that the link
between test scores and 𝜃 supports our interpretation of 𝜃 as latent ability.
Carneiro, Hansen, and Heckman (2003) show that with three test scores (i.e., 𝑑 𝑇 ≥ 3),
the distribution of 𝜃 can be non-parametrically identified up to a normalization of a single
coefficient in 𝛼 𝑇 .19 We rely on this identification strategy to develop our empirical analysis. For
further details on the identifying assumptions of discrete-continuous factor models of

endogenous decisions, labor market outcomes and test scores, see also Hansen, Heckman, and
Mullen (2004).
D. The Returns to Postsecondary Degrees
We focus on the impact of postsecondary degrees on labor market outcomes. In what
follows, we examine ex-ante economic benefits, namely, 𝐸[𝑦𝑗 (𝑡) ∣ Ω] for any 𝑗 ∈ 𝒥 and 𝑡 > 0.
This allows us to focus on returns based on what is predictable by the individual and to examine
whether she is making decisions that might not be considered optimal from a financial
perspective.
Treatment effects. Let 𝑌𝑗 be the outcome of interest associated with degree 𝑗 ∈ 𝒥. We
present two alternative definitions of the treatment effects that quantify the economic returns to
postsecondary degrees.
Let Δ𝑗0 be the economic gross benefit or loss of selecting postsecondary degree 𝑗 ∈ 𝒥
relative to the baseline alternative “high school diploma” (𝑗 = 0). Thus, our first treatment effect
is defined at the individual-level as:
(5) Δ𝑗0 ≡ 𝑌𝑗 − 𝑌 0 .
However, when evaluating the convenience of choice 𝑗, the agent compares its outcome
against that of all alternatives in 𝒥, not only the baseline option. In particular, if for some {𝑗, 𝑘} ∈
𝒥, Δ𝑗0 > 0 and Δ0𝑘 > 0, then a more economically-driven analysis should include the comparison
of options 𝑗 and 𝑘. Following this intuition, our second definition for the return to postsecondary
degrees is based on the comparison of the outcomes associated with the first- and second-best
alternatives. Specifically, let 𝑗 and 𝑘 represent the first and second best options, which are
defined as 𝑗 ≡ argmax {𝑉𝑠 }, and 𝑘 ≡ arg max {𝑉𝑠 }. Thus, the second treatment effect defined at the
𝑠∈𝒥 𝑠∈𝒥|−𝑗
individual-level is:
(6) Δ𝑗𝑘 ≡ 𝑌𝑗 − 𝑌 𝑘 .
Let 𝑿 = [𝑋𝑗𝑉 , 𝑋𝑗𝑦 , 𝑿𝑇 ]. With Δ𝑗0 and Δ𝑗𝑘 , we define the following average treatment on the
treated effects, our parameters of interest:
(7) 𝑇𝑇𝑗0 ≡ ∬ Δ𝑗0 (𝑥, 𝑧)𝑑𝐹𝑿,𝜃∣𝐷𝑗=1 (𝑥, 𝑧),
(8) 𝑇𝑇𝑗∗ ≡ ∬ ( ∑ Δ𝑗𝑘 (𝑥, 𝑧) × 𝑃𝑟[𝐷𝑘∈𝒥|−𝑗 (𝑥, 𝑧) = 1 ∣ 𝐷𝑗 = 1] ) × 𝑑𝐹𝑿,𝜃∣𝐷𝑗=1 (𝑥, 𝑧),

𝑘∈𝒥|−𝑗
where 𝑥 and 𝑧 are realizations of the observables 𝑿 and the individual unobserved ability 𝜃, respectively;
and the indicator function 𝐷𝑘∈𝒥|−𝑗 = 1 takes a value of 1 if 𝑘 is the optimal choice in 𝒥 when 𝑗 is
excluded, and 0 otherwise.
Equation (7) presents the conventional treatment on the treated parameter given a
particular schooling level.20 However, in the context of an unordered choice model, this
parameter loses some of its relevance. As discussed above, 𝑇𝑇𝑗0 assumes that the relevant
counterfactual for every degree 𝑗 ∈ 𝒥 is the alternative of not graduating from any postsecondary
institution. Given that we are considering different choices within a particular set of options,
forcing this comparison may not be adequate. To evaluate this issue, we estimate 𝑇𝑇𝑗∗ , the
average treatment on the treated based on the first- versus second-best choices (Heckman, Urzúa,
and Vytlacil 2008).
The outcomes. We consider two definitions for 𝑌𝑗 , the outcome measuring the economic
benefits of postsecondary degree 𝑗 ∈ 𝒥. First, we study the gross average annual earnings
perceived between 𝑆𝑗 + 1 and 𝑆𝑗 + 𝑇 ∗ :

𝑆 +𝑇 ∗
𝑗
∑𝜏=𝑆 𝑦𝑗 (𝜏)
𝑗 +1
𝑌̃𝑗 ≡ ,
𝑇∗
where 𝑆𝑗 + 𝑇 ∗ < 𝑇.
𝑌̃𝑗 is the outcome typically used in the empirical analysis of Mincer earnings regressions
as the one presented in section II. However, 𝑌̃𝑗 neglects the economic costs of education. In
particular, it does not account for degree j’s tuition costs. Furthermore, if we compute 𝑇𝑇𝑗0 or
𝑇𝑇𝑗∗ based on 𝑌̃𝑗 we would be excluding part of the forgone earnings associated with each
degree. For example, the decision of pursuing a five-year degree implies a longer period of labor
market inactivity (zero earnings) compared to the alternatives of four- or two-year degrees. Our
second definition of the outcome, 𝑌̃ 𝑗 for 𝑗 ∈ 𝒥, includes these factors. Specifically, we define the
net present value of earnings of degree 𝑗 as:
𝑇
∑𝑡=0 𝑦𝑗 (𝑡)
(9) 𝑌̃ 𝑗 ≡ − 𝐶𝑗 ,
(1 + 𝑟)𝑡
where 𝑟 is market interest rate, and 𝐶𝑗 represents the present value of overall tuition costs for
degree 𝑗, which is computed taking into account its duration 𝑆𝑗 . 𝐶𝑗 equals zero for individuals
choosing 𝑗 = 0 (high school diploma). We normalize 𝑡 = 0 to be age 18 (typical high school
graduation age).
It is worth noting that 𝑌̃ 𝑗 does not necessarily equal 𝑉𝑗 for 𝑗 ∈ 𝒥. Therefore, in our model,
individuals may not choose the alternative that yields the highest economic return but the highest
utility (Cameron and Heckman 2001).21

E. Empirical Implementation
Data. Our data includes administrative records on individual-level postsecondary
degrees, pre-college test scores and adult earnings. The information on postsecondary degrees
comes from administrative registers from the Chilean Ministry of Education. Table 4 presents the
list of institutions from which we observe the universe of postsecondary degrees granted in 2008.
We have information from 69, 36 and 46 institutions offering two-, four- and five-year
postsecondary degrees, respectively.
Because 2008 graduates might come from degrees of different durations, we obtain their
PSU test scores from different years. In particular, we search for their PSU scores in
administrative records from the college admission system covering the period 2001 to 2005. The
PSU evaluates students’ proficiency in three subjects: mathematics, language, and history. To
secure the comparability of results over time, we use year-specific percentiles as our measures of
academic performance. This data also contains rich individual-level information, including
student’s socio-economic characteristics and average GPA during high school.
Information on labor market outcomes comes from the Ministry of Labor’s
Unemployment Insurance System (UIS). The UIS records monthly earnings for all workers with
formal contracts in the country since November 2002. By 2013, the data contains information on
more than 7.9 million workers.22
In order to estimate the economic benefits of not graduating from a postsecondary
institution, we build a comparison group (control group) using individuals entering the labor
market right after finishing high school in 2007. We construct this group by gathering
information from administrative records on those enrolled in higher education institutions and
the college admission system. Specifically, we identify individuals who took PSU in 2007, but
who did not enroll in 2008 or 2009.23,24 In this way, we can compare the labor market outcomes
of those graduating from postsecondary institutions in 2008 to individuals entering the labor
market at the same time, without any postsecondary education.25
Model Specification. We use math, language and history PSU test scores to estimate the
measurement system described in equation (4). We include high school GPA (obtained from
PSU records) as part of it.26
In our multinomial choice estimations, we include as exogenous controls gender, age,
mother’s education and family income (from PSU records). We also incorporate average
regional tuition costs for each potential postsecondary degree. This information contributes to the
identification of our schooling choice model (Card 1999; Heckman and Navarro 2007).27
As measure of labor market outcomes, we use the log of monthly average monthly
earnings for the years 2009-2013. We use real earnings, expressed in 2013 dollars. We assume
zero earnings for months of unemployment or inactivity. We then compute monthly average
monthly earnings using 12 observations per individual per year. For those individuals with
average monthly earnings below the legal minimum wage divided by 12, we assume zero
earnings. In this way, we make sure that we consider earnings coming from at least one month of
formal full time employment during the year. For year 𝑡, we compute the average earnings using
information from October of year 𝑡 − 1 to September of year 𝑡. We do this for 𝑡=2009,…,2013.
Therefore, we estimate five earnings regressions that include age and gender covariates.
Table 5 presents the explanatory variables included in the multinomial choice model, test
score measurement system and labor market outcome equations. Table 6 presents the summary
statistics .
Estimation. We use flexible distributional assumptions to estimate the distribution of
unobserved ability, 𝑓𝜃 (∙). More precisely, we approximate this distribution using a mixture of
two normal distributions with means (𝜇1 , 𝜇2 ), probabilities (𝑝1 , 𝑝2 ) such that 𝑝1 + 𝑝2 = 1, and
variances (Σ1 , Σ2 ). The expected value of 𝜃 is normalized to zero. Formally,
𝜃 ∼ 𝑝1 Φ1 (𝜇1 , Σ1 ) + 𝑝2 Φ2 (𝜇2 , Σ2 ).
The likelihood function of the model is given by the following expression:
ℒ = ∏ ∫ 𝑓( 𝒀𝑖 , 𝑫𝑖 , 𝑻𝑖 ∣ 𝑿𝑖 , 𝜅 )𝑓𝜃 (𝜅)𝑑𝜅
𝑖
= ∏ ∫ 𝑓( 𝒀𝑖 , ∣ 𝑫𝑖 , 𝑿𝑖 , 𝜅 )𝑓( 𝑫𝑖 , 𝑻𝑖 , ∣ 𝑿𝑖 , 𝜅 )𝑓𝜃 (𝜅)𝑑𝜅

𝑖
where 𝒀𝑖 is a vector containing individual 𝑖’s average (log) of monthly earnings for the years
𝑦
2009-2013, 𝑿𝑖 contains her observed exogenous characteristics (𝑿𝑖 = [𝑋𝑗𝑉 , 𝑋𝑗 , 𝑿𝑇 ]), 𝑫𝑖 denotes
the observed choice (degree) and 𝑻𝑖 contains her test scores. We follow Hansen, Heckman, and
Mullen (2004), and assume that 𝑿𝑖 and 𝜃 are independent.28 Furthermore, we assume that the
idiosyncratic errors in equation (2) are distributed according to independent standardized normal
distributions. The baseline category in the multinomial model is “high school diploma.” The
disturbances in equations (3) and (4) are also assumed to be drawn from independent zero-mean
normal distributions.29 The associated variances are estimated within our model. Given 𝜃 and 𝑿𝑖 ,
the distribution of counterfactuals is identified and all error terms in the model are independent
from each other.
The empirical implementation follows a Bayesian Markov Chain Monte Carlo (MCMC)
method. We use this approach for practical convenience.30 With the model’s estimates, we
simulate 100,000 observations containing degree choices and labor market outcomes for factual
and counterfactual alternatives.
IV. Main Results
Figure 3 presents the estimated distribution of unobserved ability. It confirms previous

findings documenting that unobserved ability might not be normally distributed (Heckman,
Stixrud, and Urzúa 2006).
Table 7 shows the estimates of our multinomial choice model. The estimated coefficients
suggest that students coming from high-income families and with more educated mothers have a
higher probability of obtaining a postsecondary degree, particularly from universities (five-year
degrees). Given that we are accounting for tuition costs in the choice model, this result suggests
that individual’s decisions are not only influenced by direct short-term costs. Below, we analyze
the impact of tuition costs on degree choices.
Figures 4 and 5 compare the model-generated sorting profiles across degrees by latent
ability (𝜃) and average test scores, respectively. This exercise shed lights on the importance of
distinguishing between the two concepts. To secure comparability, both figures present the
cumulative distribution functions using standardized values to define the x-axis.
Although test scores and 𝜃 produce similar sorting patterns, with more able people
obtaining more lengthy degrees, Figure 5 shows that individuals choosing four-, two-year
degrees and high school diplomas have relatively more similar latent ability distributions
compared to what it is displayed in Figure 4. This confirms that estimates based only on
observable ability measurements –such as PSU scores– would lead to a different sorting structure
than a model that explicitly accounts for latent ability.
Table 8 presents estimates from the test score equations. The coefficients on age and
gender are statistically significant. In particular, males perform better in math and history, while
females obtain higher scores in language and have better grades during high school. The
coefficients associated with unobserved ability have positive signs and they are statistically
significant at the 1 percent level. 31
We use our results from the measurement system to decompose the variance of test
scores as a function of observables (gender, age, mother’s education, family income, and type of
high school), the individual’s latent ability, and the error term. This provides further evidence of
the differences between ability measures and 𝜃. Table 9 presents these results. Unobserved
ability explains large proportions of the variances. For language, math and history, it explains
51.1, 48.4, and 49.8 percent, respectively, of the overall variance. Thus, observed characteristics
and the error terms explain approximately 50 percent of the variances, except for high school
GPA. In this case, 61.4 percent of the variance is explained by the error term, 32.5 percent by the
factor, and only a small fraction (6.1 percent) is attributed to observable characteristics. 32
Table 10 presents the estimates of the equations for labor market outcomes. For all years,
unobserved ability is positively correlated with earnings and the relationship is statistically
significant. The ability-earnings gradient is always higher for two-year degrees, followed by
four-year, five-year and high school degrees. This pattern has important consequences for
treatment effects, as we explain later. The male and age coefficients have positive signs and are
statistically significant at the 1 percent level.
In order to evaluate the goodness of fit our model, we compare the distribution of choices
between the observed data and the model samples. We do this by simulating data from our
estimated model. As Figure 6 shows the simulated data closely resembles the distribution of
choices. Additionally, we compare annual average monthly earnings between the observed data
and the model simulated sample. Table 1.2 in the appendix presents these results. In general, we
cannot reject the null hypothesis that the model mimics the data.
The effect of tuition costs. We utilize our choice model to investigate the effects of
tuition costs on individual decisions. We simulate the impact of a relative reduction in tuition for
all institution types. This enables us to trace out the behavioral responses to heterogeneous
changes in tuition costs across degrees. We reduce tuition costs by 10, 50 and 100 percent, and
record individuals’ responses for each case.33 We consider this exercise a partial equilibrium
analysis, in which we do not explicitly model the tertiary institutions’ responses to changes in the
demand for postsecondary degrees.
Table 11 shows the distribution of degrees after the reduction in tuition costs. The overall
graduation rate from postsecondary institutions is essentially unaffected by the 10 percent
reduction in tuition. When tuition costs are reduced by 50 percent, the number of graduates
increases by 2.3 percent. When tuition costs are zero, postsecondary graduates rises by 8.8
percent (approximately 4,500 new college graduates).
These findings suggest that, after controlling for family background characteristics and
ability, changes in tuition costs produce negligible effects on overall enrollment. Although we
cannot rule out the presence of credit constraints, our evidence suggests that short-term credit
constraints might not play a major role in the Chilean postsecondary education system (at least in
terms of the probability of obtaining a degree).
Disguised by the stable overall graduation rate, we observe significant changes in the
composition across degrees. In general, we find that tuition reductions decrease graduation rates
from institutions offering two- and four-year degrees, whereas the effects go in the opposite
direction for universities. When tuition is free, the total number of graduates from two-year
higher education institutions reduces by 80 percent (8,406 individuals) and from four-year
institutions by 61 percent (3,740 individuals), whereas the number of individuals obtaining five-
year degrees increases by 49 percent (16,641 individuals).34,35
A. Treatment Effects
Average annual earnings. We use our estimated model to compute the economic returns
to different postsecondary degrees (treatment effects). We begin by examining the treatment

effects based on annual average earnings. Specifically, we simulate average annual earnings for
the years 2009-2013 and construct treatment effects by comparing the outcome associated with
the first-best choice 𝑗 ∈ 𝒥 against the alternative of high school diploma (𝑇𝑇𝑗0 ), as well as
relative to the second-best choice (𝑇𝑇𝑗∗ ). Table 12 presents these estimates. It also displays the
associated percentage changes (𝑟𝑗0 and 𝑟𝑗∗ ) and the corresponding probabilities of obtaining
negative rates of return.
For 𝑇𝑇𝑗0 and 𝑟𝑗0 the evidence confirms that, on average, obtaining a postsecondary degree
would lead to positive economic returns. Panel A in Table 12 shows that five-year postsecondary
degrees have the highest returns among all alternatives, followed by four- and two-year degrees.
Moreover, the average likelihood of negative returns is practically zero, except for those
obtaining two-year degrees. In this group, we estimate that the ex-ante probability of facing
negative returns is 4.56 percent.
To analyze the role of unobserved ability, Figure 7 (panel A) presents the treatment effect
conditional on unobserved ability 𝜃, 𝑇𝑇𝑗0 (𝜃). The right panel of Figure 7 presents the
distributions of ability by type of degree. For each degree 𝑗, we document substantial
heterogeneity. Specifically, we find that higher levels of ability improves the gain of any
postsecondary degree relative to the high school choice. Although the average gradient of ability
and treatment effects is positive for every choice, the slope is higher for two-year degree,
followed by four-year and five-year degrees.
On the other hand, treatment effects based on second-best alternatives as benchmark,
𝑇𝑇𝑗∗ , are positive on average, although lower than 𝑇𝑇𝑗0 . Panel B in Table 12 shows that the
average level of 𝑇𝑇𝑗∗ is higher for four-year than for five- and two-year degrees. This finding may
seem surprising given the fact that individuals choosing five-year degrees present higher average
levels of ability, and thus one should expect higher earnings for them. Nonetheless, high-ability
individuals are also highly rewarded when obtaining other degrees. Indeed, Table 10 shows that
the effect of ability on earnings is higher for two- and four-than for five-year degrees.
The distribution of second-best choices is critical for understanding the results presented
in Table 12. Table 13 shows these distributions, conditional on first-best choice. We observe that
the majority of individuals obtaining a five-year degree list two- or four-year degrees as a
second-best choice.36 Thus, the relatively high propensity of obtaining negative returns for five-
year degree holders emerges from the fact that a large fraction of them would have received
higher earnings have they chosen their second-best choices: two- and four-year degrees (see
Table 1.3 in the appendix).37
The role of unobserved ability in the treatment on the treated indicators is further
illustrated in Figure 8, which shows a non-parametric estimate of the treatment effects
conditional on unobserved ability, 𝑇𝑇𝑗∗ (𝜃), across degrees. For five-year degrees, the treatment
effect based on the first- versus second-best choices generally decreases as the levels of θ
increases (right panel in Figure 7 shows that this is the case for most of the sample). For two-
year degrees, the treatment effect rises with the level of unobserved skills, while for four-year
degrees we obtain almost no association between these two variables.
Therefore, our findings are consistent with the hypothesis of large heterogeneity in the
returns to postsecondary degrees. Unobserved ability is an important underlying factor
determining the average treatment effects on the treated 𝑇𝑇𝑗∗ . In particular, when investigating
five-year degrees, we find that the associated returns can be negative for high-ability individuals.
This is due to the fact that as 𝜃 increases the economic benefits of the second-best choices
increase more rapidly than those from their first-best alternative.
Net present values. We have neglected so far from our analysis the role of tuition costs,
length of degrees, and forgone earnings. In what follows, we present an exercise that explicitly
incorporates these ingredients into the analysis.
We compute the individual-level net present value of earnings, 𝑌̃𝑗 , for each degree type 𝑗
as defined in equation (9). However, for each individual, our data contains only five realizations
of annual earnings (2009-2013). To overcome this data limitation, we use the results from our
model to generate individual-level future earnings. More precisely for each parameter in the
equation describing the data generating process of (log) earnings (equation 3), we posit a model
describing its dynamics. We illustrate this strategy with the set of coefficients capturing the
𝑦
effect of 𝜃 on degree 𝑗’s earnings, 𝛼𝑗,𝑡 with 𝑡 = 1, … ,5. In particular, we first estimate the
𝑦
following regression model for 𝛼𝑗,𝑡 :
𝑦
𝛼𝑗,𝜏 = 𝑎𝑗 + 𝑏𝑗 ln(𝜏) + 𝜀𝑗,𝜏 for 𝜏 = 1, … ,5,
where 𝜀𝑗,𝜏 represents a non-systematic error.38
We estimate this model using the estimated values reported in Table 10. Then, we use the
𝑦
OLS estimates of 𝑎𝑗 and 𝑏𝑗 to predict the values of 𝛼𝑗,𝜏 for any 𝜏 = 1 … , 𝑇. We repeat these steps
𝑦 𝑦 𝑦
for each of the parameters in equation (3) (namely, 𝛼𝑗,𝜏 , 𝛽𝑗,𝜏 and 𝜎𝑗,𝜏 for all 𝑗 ∈ 𝒥, where the last
𝑦
coefficient corresponds to the variance of the distribution of 𝜈𝑗,𝜏 ). We use these estimated
parameters to generate annual earnings for 𝜏 = 1, … 𝑇, and 𝑗 ∈ 𝒥. Finally, to compute net
present values, 𝑌̃𝑗 (expression 9), we assume that two-, four- and five-year degree holders are 20,
22 and 23 years of age, respectively, when they enter the labor market for the first time. In other
words, our exercise assumes that each individual graduates from high school by age 18.
Additionally, we assume 𝑟=0.06.39
Figure 9 shows the estimated average age-earnings profiles for each degree between ages
18 to 65. The implicit average present value of earnings (from age 18 to 65) for high school
graduates is 228,040 dollars, for those obtaining two-year degrees 597,020 dollars, 697,583
dollars for four-year degree holders, and 802,246 dollars for five-year degree holders. From the
figure, we can see the different tradeoffs across degrees. The economic cost of five-year degrees
includes high tuition costs and more years of education, but higher earnings in the future than the
alternatives. At the other end, a high school diploma implies no tuition costs, it allows the
individual to enter the labor market immediately, but its associated future earnings are
significantly lower than those coming from the alternatives.
Table 14 presents our estimates for 𝑇𝑇𝑗0 and 𝑇𝑇𝑗∗ based on present values of earnings. As
expected, the levels of treatment on the treated indicators are higher when compared to the
corresponding numbers from Table 12. Treatment effects based on first-best choice versus high
school diploma are positive on average for all choices (see Panel A), and the probability of
negative returns is close to 0. Furthermore, 𝑇𝑇𝑗0 increases with unobserved ability regardless of
the type of degree considered (Figure 10).
When analyzing treatment effects of first-versus second-best choices (Panel B in Table
14), we find a relatively high proportion of individuals with negative returns. For five-, four- and
two-year degrees, these probabilities equal 36.8, 18.9 and 35.5 percent, respectively. Again, the
large proportion of individuals choosing five-year degrees with negative returns is explained by
high opportunity costs coming from second-best alternatives (see Table 1.4 in the appendix).40
As in the case of 𝑇𝑇𝑗0 , unobserved ability plays an important role as determinant of 𝑇𝑇𝑗∗ .
Indeed, consistent with the pattern of Figure 8, although in a different scale, Figure 11 shows that
five-year degree treatment effects is decreasing in 𝜃, as the earnings coming from second-best
choices rise more rapidly than those associated with the first-best choice of five-year degree. The
treatment effects for two-year degrees always increase with unobserved ability.
Overall, these results are consistent with our analysis of average annual earnings. There is
a high degree of heterogeneity. Relative levels and dispersion in unobserved ability determine
the opportunity costs of each degree. High-ability individuals choosing five-year degree have a
higher likelihood of obtaining negative returns, given that the net economic gain of other
schooling choice becomes higher.
V. Conclusions
In this paper we estimate heterogeneous returns to different types of postsecondary
degrees in Chile. We account for selection based on observed and unobserved characteristics
across the available alternatives. Our identification strategy rests on the presence of an
unobserved endowment (ability), which generates the correlation between postsecondary
schooling decisions and future labor market outcomes.
Using an unordered choice framework we document significant sorting across degrees by
unobserved ability. Importantly, this sorting pattern differs from what we obtain using observed
test scores. Additionally, we use this setup to examine the impact of tuition costs on individuals’
decisions. We document non-trivial changes in the composition of postsecondary graduates as a
result of these exercises, but stable overall graduation. Our evidence suggests, although not
conclusively, that short-term financial constraints might not play a major role determining access
to the Chilean postsecondary education system.
We complement the choice model with labor market outcomes. This setup is capable of
producing a variety of treatment effects identifying the economic returns to postsecondary
degrees. We focus our analysis on two versions of the average treatment effects on the treated
(first-best degree versus the alternative of a high school diploma and first- versus second-best
choices) and two alternative definitions for the outcome (average annual earnings in the five-year
period after graduation and present values of earnings).
Overall, we find that compared to the alternative of graduating from high school and not
pursuing a postsecondary degree, on average, all postsecondary degrees have positive economic
returns. However, when we compare first- versus second-best choices, we document large
proportions of students facing negative monetary returns. The likelihood of obtaining negative
returns is increasing with ability for those who choose five-year degrees as their first-best
alternative. This result is due to the fact that economic benefits of second-best choices increase
faster with individual’s latent ability than those of a five-year degree. This finding demonstrates
the role of unobserved heterogeneity as determinant of labor market outcomes and treatment
effects.
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Table 1
Distribution of Test Scores, Family Income and Mother’s Education across Degrees
Two-year Four-year Five-year High school

Group\Degree degree degree degree diploma
PSU quintiles
1 0.10 0.04 0.04 0.82
2 0.14 0.07 0.11 0.68
3 0.14 0.09 0.22 0.55
4 0.11 0.08 0.48 0.32
5 0.03 0.02 0.86 0.08
Family income
(monthly USD)
<556 0.11 0.05 0.22 0.62
557 - 1668 0.12 0.09 0.50 0.29
1669 - 2800 0.07 0.07 0.67 0.19
2801 - 3900 0.04 0.07 0.71 0.18
>3900 0.03 0.04 0.79 0.15
Mother's years of
education
<8 0.10 0.04 0.16 0.70
8-11 0.12 0.06 0.23 0.58
12 0.11 0.07 0.35 0.47
> 0.08 0.07 0.61 0.24
Notes: Each cell displays the proportion of individuals obtaining each degree conditional
on the specific group (first column). We use the 2008 census of graduates from higher education
institutions in Chile. We use PSU data from 2001 to 2005 to gather information on college
admission test scores and socioeconomic variables. The “high school” group consists of
individuals who took the college admission exam in year 2007, but did not enroll in any
postsecondary institution in 2008 or 2009. We build PSU quintiles based on the average of test
scores on the subjects of math, language, and history. We also include high school GPA in this
calculation.
Table 2
OLS Regressions: Mincerian Returns to Postsecondary Degrees
Variables (1) (2) (3) (4) (5)
Two-year degree 0.616*** 0.623*** 0.624*** 0.598*** 0.567***

(0.020) (0.020) (0.020) (0.020) (0.020)
Four-year degree 0.889*** 0.902*** 0.900*** 0.867*** 0.836***
(0.024) (0.025) (0.025) (0.025) (0.025)
Five-year degree 1.063*** 1.085*** 1.061*** 0.903*** 0.855***
(0.016) (0.018) (0.018) (0.020) (0.021)
Male Yes Yes Yes Yes Yes

Age Yes Yes Yes Yes Yes
Mother's
Education - Yes Yes Yes Yes
Family Income - - Yes Yes Yes
PSU - - - Yes Yes
GPA - - - - Yes
Observations 46,593 46,593 46,593 46,593 46,593
Notes: The dependent variable corresponds to the log of average annual earnings for the
2009-2013 period. We use the 2008 census of graduates from higher education institutions in
Chile. We use PSU data from 2001 to 2005 to gather information on college admission test
scores and socioeconomic variables. The baseline category (high school) consists of individuals
who took the college admission exam in year 2007, but did not enroll in any postsecondary
institution in 2008 or 2009. In column (4), we add math, language and history test scores as
controls. Column (5) adds high school GPA. Math, language, history and GPA scores correspond
to the individual’s year-specific percentile. Two-, four- and five-year degree are dummy
variables. Standard errors are in parentheses. *** p<0.01. ** p<0.05. * p<0.1.

Table 3
Annual Tuition Costs by Type of Institution and Geographical Region (US dollars, 2007)
Two-year Four-year Five-year

Region degree degree degree
I 1,770 1,906 2,443

II 1,914 1,901 2,436
III 1,537 1,763 2,414
IV 1,505 1,775 3,321
V 1,559 1,927 2,896
VI 1,867 1,945 2,271
VII 1,536 1,696 2,960
VIII 1,606 1,713 3,000
IX 1,537 1,971 3,052
X 1,548 1,658 3,005
XI 1,927 1,789 2,021
XII 1,747 1,728 2,496
RM 1,538 1,969 4,152
National
average 1,661 1,826 2,805
Source: Administrative records from the Chilean Ministry of Education.

Table 4
Postsecondary Institutions
Two-year degree institutions: Acuario Data de Santiago, Alexander von Humbodt,

Alpes, Andrés Bello, Austral, Barros Arana, , Cámara de Comercio de Santiago, CEDUC-
UCN, CEITEC, CENCO, , Empresarial IFE, INFOMED, CEPA de la III Región,
CEPONAL, CRECIC, CROWNLIET, ENAC, de Tarapacá, TEC, del Medio, Ambiente,
Diego Portales, DUOC UC, EACE, EDUCAP, ESANE del Norte, Escuela de Artes
Aplicadas Oficios, Escuela de Intérpretes, ESI, Esperanza Joven, Estudio Profesor Valero,
ESUCOMEX, FONTANAR, ICEL, Ignacio Domeyko, INACAP, Instituto Chileno
Británico de Cultura, Luis Albe, Instituto de Secretariado, Alemán de Comerio, Gamma,
Instituto de Estudio Jurídicos, Instituto Tecnológico de Chile, IPROSEC, ITPUCH,
LAPLACE, Javiera Carrera, Jorge Alvarez, Juan Bohon, La Araucana, Los Fundadores,
Los Leones, Lota-Arauco, MAGNOS, Massachusetts, Osorno, PRODATA, PROFASOC,
PROTEC, Salesianos Don Bosco, San Agustín de Talca, Santo Tomás, Simón Bolívar,
SOEDUC Aconcagua, Teodoro Wickel, U. Valparaíso, UCEVALPO, UDA, UTEM
Four-year degree institutions: Arturo Prat, Adventista, Agrario Adolfo Matthei, Alemán
Wilhelm H., Alpes, Carlos Casanueva, Chileno Británico de Cultura, CIISA, ARCOS, de
Chile, Acuario, INCACEA, Helen Keller, ENAC, de Los Angeles, Valle Central, Diego
Portales, Dr. Virginio Gómez, DUOC UC, EATRI, Escuela de Contadores Auditores,
Escuela Moderna de Música, ESUCOMEX, Hogar Catequístico, INACAP, Estudios
Bancarios, Instituto Nacional del Fútbol, IPROC GAMMA, La Araucana,
Latinoamericano de Comercio Exterior, Libertador de Los Andes, Los Lagos, Los
Leones, Providencia, Santo Tomás, Teatro La Casa.
Five-year degree institutions: Arturo Prat, de Antofagasta, de Atacama, de Chile, de La
Frontera, de La Serena, de Los Lagos, de Magallanes, de Playa Ancha, de Santiago de
Chile, de Talca, de Tarapacá, de Valparaíso, del Bío-Bío, Metropolitana de Ciencias,
Tecnológica Metropolitana), Católica de Chile, Católica de Valparaíso, Austral de Chile,
de Chile, Católica de la Santísima Concepción, Católica de Temuco, Católica del Norte,
de Concepción, Técnica Federico Santa María, Academia Humanismo Cristiano, Adolfo
Ibáñez, Adventista de Chile, Alberto Hurtado, Autónoma de Chile, Bernardo O'Higgins,
Bolivariana, Católica Silva Henríquez, Central de Chile, de Aconcagua, ARCIS, de
Ciencias de la Informática, de Artes, Ciencias y Comunicación, de las Américas,
Universidad de Los Andes, de Viña del Mar, del Desarrollo, del Mar, del Pacífico, Diego
Portales, Finis Terrae, Iberoamericana, SEK, Marítima de Chile, Miguel de Cervantes,
Nacional Andrés Bello, Pedro de Valdivia, Regional San Marcos, San Sebastián, Santo
Tomás, Tecnológica de Chile INACAP.
Notes: This table uses information from the census of postsecondary degree holders of
2008.
Table 5
Variables in the Schooling Choice Model
Multinomial schooling choice model
Variables Two-year Four-year Five-year

degree degree degree
Age Yes Yes Yes
Male Yes Yes Yes
Mother's education (dummies) Yes Yes Yes
Family income (dummies) Yes Yes Yes
High school type (dummies) - - -
Tuition two-year degree (region’s
average) Yes - -
Tuition four-year degree (region’s
average) - Yes
Tuition five-year degree (region’s
average) - - Yes
Unobserved ability Yes Yes Yes
Constant Yes Yes Yes
(continued)
Table 5 (continued)
Variables in Measurement System
Measurement system
Variables Language Math History GPA
Age Yes Yes Yes Yes
Male Yes Yes Yes Yes
Mother's education (dummies) Yes Yes Yes Yes
Family income (dummies) Yes Yes Yes Yes
High school type (dummies) Yes Yes Yes Yes
average) - - - -
average) - - - -
average) - - - -
Unobserved ability Yes Yes Yes Yes
Constant Yes Yes Yes Yes
(continued)
Table 5 (continued)
Variables in Earnings Regressions
Earnings 2009-2013
Two-year Four-year Five-year High
Variables
degree degree degree school
Age Yes Yes Yes Yes
Male Yes Yes Yes Yes
Mother's education (dummies) - - - -
Family income (dummies) - - - -
High school type (dummies) - - - -
average) - - - -
average) - - - -
average) - - - -
Unobserved ability - - - -
Constant Yes Yes Yes Yes
Notes: We show the variables used in our empirical model. In the multinomial choice
model we assume individuals choose between two-, four-, five-year postsecondary degrees or
only high school (baseline category). In the measurement system we use math, language, history
test scores and high school GPA. For two-, four- and five-year degrees holders we use
information on the last PSU that they took between the years 2001 and 2005. For the high school
group we use PSU data from 2007. Each test score corresponds to a year-specific percentile. We
estimate 20 earnings regressions (five time periods and four degrees).

Table 6
Summary Statistics
Variables Mean S.D. Min Max

Language PSU 484.4 116.6 158 818
Math PSU 486.5 125.8 114 828
History PSU 488.9 116.0 163 838
High school GPA 541.7 101.2 208 825
Age (2008) 22.7 3.2 18 74
Male 0.439 0.496 0 1
Mother with less than 8 years of education 0.160 0.367 0 1
Mother with 8-11 years of education 0.288 0.453 0 1
Mother with12 years of education 0.328 0.469 0 1
Mother with more than 12 years of
education 0.224 0.417 0 1
Family Income (0 - 556 dollars per month) 0.643 0.479 0 1
Family Income (557 - 1668 dollars per
month) 0.251 0.434 0 1
month) 0.050 0.218 0 1
month) 0.020 0.139 0 1
Family Income (more than 3900 dollars per
month) 0.036 0.186 0 1
High school: private-fee-paying 0.120 0.325 0 1
High school: private-voucher 0.398 0.490 0 1
High school: public 0.482 0.500 0 1
Two-year degree 0.105 0.307 0 1
Four-year degree 0.062 0.241 0 1
Five-year degree 0.343 0.475 0 1
Only high school 0.490 0.500 0 1
Average regional tuition two-year degree 1.585 0.102 1.505 1.927
Average regional tuition four-year degree 1.885 0.113 1.658 1.971
Average regional tuition five-year degree 3.407 0.681 2.021 4.152
Average monthly earnings 2009 (USD) 604.9 554.8 30.0 4,485.0
Notes: This table displays summary statistics for the variables utilized in our empirical
analysis. We use the 2008 census of graduates from higher education institutions in Chile. We
use PSU data from 2001 to 2005 to gather information on college admission test scores and
socioeconomic variables. The baseline category (high school) consists of individuals who took
the college admission exam in year 2007, but did not enroll in any postsecondary institution in
2008 or 2009. Sample size is 54,242 individuals. We show in this table the raw PSU scores.
Mother’s education, family income and type of high school are dummy variables. Annual tuition
corresponds to the regional average tuition of the type of degree chosen by the individual.
Table 7
Multinomial Choice Model: Estimates
Two- Four- Five-

Variables Year Year year
Age (2008) 0.233 0.260 0.396

(0.003) (0.004) (0.004)
Male -0.052 -0.062 -0.657
(0.022) (0.026) (0.025)
Mother with 8-11 years of education 0.379 0.489 0.654
(0.032) (0.041) (0.040)
Mother with 12 years of education 0.433 0.613 1.033
(0.034) (0.042) (0.041)
Mother with >12 years of education 0.508 0.855 1.631
(0.042) (0.049) (0.047)
Family Income: 0-566 dollars/month 0.450 0.699 0.990
(0.027) (0.030) (0.029)
Family Income: 567-1668
dollars/month 0.321 0.735 1.381
(0.063) (0.064) (0.058)
dollars/month 0.175 0.762 1.491
(0.109) (0.099) (0.089)
dollars/month 0.006 0.437 1.649
(0.099) (0.089) (0.074)
Annual tuition costs 1.050 0.389 -0.480
(0.189) (0.208) (0.030)
Unobserved ability 0.611 0.887 3.108
(0.039) (0.044) (0.046)
Constant -7.566 -8.313 -9.709
(0.172) (0.216) (0.116)
Notes: Each column presents the estimated parameters from the multinomial choice
model. “High school diploma” is the baseline category. Annual tuition corresponds to the
regional average tuition of each type. Mother’s education and family income are dummy
variables. The baseline categories for these are: mother with less than 8 years of education and
family income less than 566 dollars per month, respectively. Standard errors are in parentheses.
Table 8
Measurement System: Estimates
Variables Language Math History GPA
Age (2008) 0.051 0.052 0.054 0.024

(0.001) (0.001) (0.001) (0.001)
Male -0.020 0.123 0.100 -0.172
(0.004) (0.005) (0.005) (0.005)
Mother with 8-11 years of
education 0.072 0.064 0.046 -0.037
(0.006) (0.007) (0.007) (0.008)
Mother with 12 years of
education 0.153 0.130 0.104 -0.040
(0.006) (0.008) (0.007) (0.008)
Mother with >12 years of
education 0.354 0.339 0.279 0.074
(0.008) (0.010) (0.008) (0.009)
dollars/month 0.120 0.147 0.104 0.035
(0.006) (0.007) (0.006) (0.006)
dollars/month 0.190 0.257 0.189 0.121
(0.012) (0.014) (0.013) (0.013)
dollars/month 0.216 0.391 0.216 0.136
(0.017) (0.021) (0.019) (0.019)
dollars/month 0.236 0.459 0.235 0.150
(0.015) (0.018) (0.016) (0.017)
Private-fee-paying high school 0.207 0.314 0.165 0.068
(0.009) (0.011) (0.010) (0.011)
Private-voucher high school 0.051 0.033 0.035 0.012
(0.004) (0.005) (0.004) (0.005)
Unobserved ability 1.000 1.175 1.023 0.790
- (0.007) (0.005) (0.006)
Constant -1.037 -1.097 -1.092 0.205
(0.019) (0.023) (0.020) (0.020)
Notes: The table displays the estimation results from the measurement system (test
scores). The dependent variable is 𝑔(𝑥) = ln(𝑥/(1 − 𝑥)), where 𝑥 denote the PSU (language,
math, history or GPA) year-specific percentile. Mother’s education, family income and type of
high school are dummy variables. The baseline categories for these variables are: mother with
less than 8 years of education, family income less than 566 dollars per month and public high
school, respectively. Standard errors are in parentheses.

Table 9
Variance Decomposition of Test Scores
Variable Language Math History GPA
Observables 22.2 22.2 18.9 6.1

Ability 51.1 48.4 49.8 32.5
Error Term 26.7 29.4 31.3 61.4
Total 100 100 100 100

Notes: We show the contribution of each variable to the variance of test scores. We use a
simulated sample from our model. The row “observables” indicates the share of the variance of
the test score explained by the observed variables: age (2008), dummy for male, family income,
mother’s education and type of high school. The row labeled “Ability” shows the proportion of
the test score variance explained by the unobserved factor. Finally, the row labeled “Error Term”
presents the share of each test score variance explained by the unobserved idiosyncratic error of
the schooling model.

Table 10
Earnings Regressions: Estimates
Two- Four- Five-

High
year year year
school
2009
Age (2008) 0.055 0.062 0.041 0.021

(0.007) (0.011) (0.004) (0.003)
Male 0.253 0.231 0.110 0.153
(0.027) (0.037) (0.019) (0.013)
Unobserved
ability 1.074 0.770 0.528 0.261
(0.071) (0.082) (0.019) (0.029)
Constant 10.950 10.886 11.388 11.403
(0.160) (0.257) (0.108) (0.056)
2010
Age (2008) 0.049 0.047 0.023 0.019

(0.006) (0.010) (0.004) (0.003)
Male 0.200 0.252 0.129 0.203
(0.027) (0.034) (0.017) (0.013)
Unobserved
ability 1.099 0.833 0.515 0.250
(0.069) (0.075) (0.018) (0.030)
Constant 11.405 11.545 12.179 11.564
(0.144) (0.232) (0.099) (0.055)
2011
Age (2008) 0.042 0.051 0.014 0.014

(0.006) (0.009) (0.004) (0.003)
Male 0.260 0.276 0.167 0.272
(0.025) (0.033) (0.016) (0.013)
Unobserved
ability 1.158 0.750 0.488 0.249
(0.073) (0.080) (0.018) (0.029)
Constant 11.768 11.685 12.642 11.760
(0.147) (0.225) (0.095) (0.051)
Table 10 (continued)
Earnings Regressions: Estimates
Two- Four- Five-

High
year year year
school
2012
Age (2008) 0.037 0.057 0.006 0.011

(0.006) (0.009) (0.004) (0.003)
Male 0.351 0.275 0.196 0.278
(0.025) (0.033) (0.015) (0.014)
Unobserved
ability 1.139 0.714 0.459 0.215
(0.071) (0.073) (0.017) (0.032)
Constant 11.998 11.731 13.006 11.933
(0.143) (0.223) (0.089) (0.055)
2013
Age (2008) 0.0361 0.0456 0.0048 0.0124

(0.006) (0.009) (0.004) (0.003)
Male 0.3665 0.2946 0.2042 0.3050
(0.026) (0.032) (0.015) (0.014)
Unobserved
ability 1.104 0.683 0.427 0.229
(0.070) (0.067) (0.016) (0.031)
Constant 12.149 12.160 13.173 12.026
(0.149) (0.214) (0.091) (0.058)
Notes: The dependent variable corresponds to the log of annual average monthly earnings
for each year in the period 2009-2013. The average monthly earning in year 𝑡 is defined as the
sum of earnings from October of year 𝑡 − 1 to September of year 𝑡 divided by 12 (we are
including months in which earnings are 0). The actual sample used in these regressions depends
on the number of individuals whose average monthly earnings exceed zero. In 2009, 2010, 2012
and 2013 we use 34,394, 35,932, 36,881, 37,328 and 37,449 observations, respectively. Standard
errors are in parentheses.

Table 11
Distribution of Choices after a 10, 50 and 100 Percent Reduction in Annual Tuition
Choice after tuition reduction

Only
Two- Four- Five-
high
year year year
Ex-ante choice school Total
-10 percent
Two-year 9,252 58 646 538 10,494

Four-year 0 5,680 351 150 6,181
Five-year 0 0 34,198 0 34,198
Only high school 0 1 683 48,443 49,127
Total 9,252 5,739 35,878 49,131 100,000
-50 percent
Two-year 5,050 194 3,135 2,115 10,494

Four-year 0 3,822 1,792 567 6,181
Five-year 0 0 34,198 0 34,198
Only high school 0 7 3,840 45,280 49,127
Total 5,050 4,023 42,965 47,962 100,000
-100 percent
Two-year 2,088 196 5,425 2,785 10,494

Four-year 0 2,235 3,176 770 6,181
Five-year 0 0 34,198 0 34,198
Only high school 0 10 8,040 41,077 49,127
Total 2,088 2,441 50,839 44,632 100,000
Notes: We present the number of graduates coming from different types of postsecondary
degrees (and individuals not pursuing postsecondary education) before (in columns) and after (in
rows) the reduction in tuition. The numbers in this table are based on a simulated sample of
100,000 individuals.
Table 12
Estimated Treatment Effect on the Treated based on Average Annual Earnings after Graduation
(2009-2013)
Treatment effect Two-year Four-Year Five-Year
A. First choice vs high school
𝑇𝑇𝑗0 (thousands of USD) 5.03 8.04 11.20

[4.93, 5.12] [7.94, 8.14] [11.16, 11.25]
𝑟𝑗0 × 100 67.51 110.79 146.55

[66.46, 68.56] [109.78, 111.80] [146.22, 146.87]
Pr(𝑟𝑗0 < 0) × 100 4.56 0.08 0

[4.17, 4.96] [0.01, 0.15] -
Pr(𝑟𝑗0 < −0.1) × 100 2.22 0.03 0

[1.94, 2.50] [-0.01, 0.08] -
B. First- versus second-best choice
𝑇𝑇𝑗∗ (thousands of USD) 1.14 3.80 2.90

[1.04, 1.23] [3.69, 3.90] [2.78, 3.01]
𝑟𝑗∗ × 100 22.25 49.60 62.92

[21.23, 23.27] [48.32, 50.89] [62.10, 63.75]
Pr(𝑟𝑗∗ < 0) × 100 43.89 20.63 30.83

[42.94, 44.84] [19.62, 21.64] [30.34, 31.32]
Pr(𝑟𝑗∗ < −0.1) × 100 8.87 21.02

[36.21, 38.06] [8.16, 9.57] [20.59, 21.45]
Notes: We show treatment on the treated estimators (rows) conditional on first-best
choices: two-, four- and five-year degrees (columns). 95 percent confidence intervals are shown
in brackets. Let 𝑌 𝑙 = 𝑌(𝑥, 𝑧) be the economic benefit of degree 𝑙 ∈ 𝒥 ={high school, two-year,
four-year, five-year}, where 𝑥 and 𝑧 are realizations of the observables 𝑿 and the individual
unobserved ability 𝜃, respectively. In this table, 𝑌𝑗 is the annual average earnings for the period
2009-2013. Let 𝑗 = 0 indicate “high school diploma.” Let 𝑗 and 𝑘 denote the first- and second-
best choices, respectively. We define Δ𝑗0 = 𝑌𝑗 − 𝑌 0 and Δ𝑗𝑘 = 𝑌𝑗 − 𝑌 𝑘 . Finally, Pr(𝐴) denotes
the probability of event 𝐴. Panel A (B) presents treatment on the treated estimators on first-best
choice versus high school (second-best choice). For Δ𝑗0 and Δ𝑗𝑘 , we construct the average
treatment effects on the treated:
𝑇𝑇𝑗0 ≡ ∬ Δ𝑗0 (𝑥, 𝑧)𝑑𝐹𝑿,𝜃∣𝐷𝑗=1 (𝑥, 𝑧),
𝑇𝑇𝑗∗ ≡ ∬ ( ∑ Δ𝑗𝑘 (𝑥, 𝑧) × 𝑃𝑟[𝐷𝑘∈𝒥|−𝑗 (𝑥, 𝑧) = 1 ∣ 𝐷𝑗 = 1] ) × 𝑑𝐹𝑿,𝜃∣𝐷𝑗=1 (𝑥, 𝑧),

𝑘∈𝒥|−𝑗
where 𝐷𝑗 equals 1 if the first-best choice is 𝑗 and 0 otherwise. 𝐷𝑘∈𝒥|−𝑗 equals 1 if the second-best
choice is 𝑘 and 0 otherwise. r𝑗0 and r𝑗∗ are computed using analogous expressions, but using
𝑌𝑗 ⁄𝑌 0 − 1 and 𝑌𝑗 ⁄𝑌 𝑘 − 1 instead of Δ𝑗0 and Δ𝑗𝑘 , respectively.

Table 13
Distribution of First- and Second-best Choices (in percentages)
First Best
Second Best Two- Four- Five- High
year year year school
Two-year degree - 20.5 29.0 44.7
Four-year degree 14.9 - 27.7 24.2
Five-year degree 30.4 35.8 - 31.1
High school 54.7 43.7 43.3 -
Total 100 100 100 100
Notes: First- and second-best options are defined as:
𝑗 ∗ ≡ arg max{𝑉𝑗 } (First-best)

𝑗∈𝒥
𝑘 ∗ ≡ arg max ∗{𝑉𝑘 } (Second-best)

𝑘∈𝒥|−𝑗
where 𝒥 = {two-year, four-year, five-year, high school}.

Table 14
Estimated Treatment Effect on the Treated based on Present Value of Earnings
𝑇𝑇𝑗0 (thousands of USD) 364.59 461.72 558.26

[359.02, 370.17] [457.29, 466.15] [556.33, 560.20]
𝑟𝑗0 × 100 148.41 193.27 229.42

[146.65, 150.17] [192.02, 194.51] [228.87, 229.97]
Pr(𝑟𝑗0 < 0) × 100 0.58 0.00 0.00

[0.44, 0.73] - -
Pr(𝑟𝑗0 < −0.1) × 100 0.34 0.00 0.00

[0.23, 0.45] - -
𝑇𝑇𝑗∗ (thousands of USD) 150.75 216.90 117.12

[144.92, 156.57] [211.06, 222.74] [110.90, 123.35]
𝑟𝑗∗ × 100 67.14 85.17 98.98

[65.31, 68.98] [82.96, 87.39] [97.61, 100.34]
Pr(𝑟𝑗∗ < 0) × 100 35.48 18.95 36.77

[34.56, 36.39] [17.97, 19.92] [36.26, 37.28]
Pr(𝑟𝑗∗ < −0.1) × 100 28.92 8.82 27.55

[28.05, 29.79] [8.11, 9.52] [27.07, 28.02]
in brackets. Let 𝑌 𝑙 = 𝑌 𝑙 (𝑥, 𝑧) be the economic benefit of degree 𝑙 ∈ 𝒥 ={high school, two-year,
four-year, five-year}, where 𝑥 and 𝑧 are realizations of the observables 𝑿 and the individual
unobserved ability 𝜃. In this table, 𝑌 𝑙 corresponds to the present value of earnings (ages 18 to
65). Let 𝑗 = 0 indicate “high school diploma.” Let 𝑗 and 𝑘 denote the first- and second-best
choices. We define Δ𝑗0 = 𝑌𝑗 − 𝑌 0 and Δ𝑗𝑘 = 𝑌𝑗 − 𝑌 𝑘 . Pr(𝐴) denotes the probability of event 𝐴.
Panel A (B) presents treatment on the treated estimators on first-best choice versus high school
(second-best choice). For Δ𝑗0 and Δ𝑗𝑘 , we construct the average treatment effects on the treated as
follows:

𝑘∈𝒥|−𝑗
𝑌𝑗 ⁄𝑌 0 − 1 and 𝑌𝑗 ⁄𝑌 𝑘 − 1 instead of Δ𝑗0 and Δ𝑗𝑘 , respectively.

Figure 1
Distribution of Postsecondary Degrees (2008), by Percentile of Test Scores
Notes: The PSU score used in this graph corresponds to the average of the math,
language and history test scores percentiles. High school GPA (in the same scale as PSU test
scores) is also included. See Table 1 notes for a description of the sample.
Figure 2
Average Annual Monthly Earnings by Type of Degree, 2009-2013
Notes: The average monthly earning in year 𝑡 is defined as the sum of earnings from
October of year 𝑡 − 1 to September of year 𝑡 divided by 12 (we are including months of
economic inactivity). See Table 1 notes for a description of the sample.

Figure 3
Density Function of Unobserved Ability (𝜃)
Notes: We show the estimated density of the individual-level unobserved ability. We
obtain this density using the simulated sample from our estimated model. The sample size is
100,000. We approximate the distribution of the individual’s unobserved ability by a two-
component mixture of normal distributions:
𝜃 ∼ 𝑝1 𝑁1 (𝜇1 , 𝜎12 ) + 𝑝2 𝑁2 (𝜇2 , 𝜎22 )
The estimated coefficients are (𝜇1 , 𝜇2 ) = (0.225, −0.146), (1⁄𝜎12 , 1⁄𝜎22 ) =
(3.033,13.802), and (𝑝1 , 𝑝2 ) = (0.367,0.633).

Figure 4
Distribution of Average Test Scores by Degree
Notes: Each line represents the cumulative distribution of PSU test scores for a specific
degree (including high school diploma). The test score corresponds to the average of the year-
specific percentiles of math, language, history scores and high school GPA. To provide a proper
comparison with Figure 5, we standardized the resulting average test scores.

Figure 5
Distribution of 𝜃 by Type of Degree
Notes: We show the simulated cumulative distribution of individual’s unobserved ability
(𝜃) across degrees (including high school diploma). We show in this graph the standardized
values of 𝜃 to provide a proper comparison with Figure 4.

Figure 6
Goodness of Fit: Distribution of Schooling decisions, Data versus Model-Simulated Sample
Notes: We compare in this graph the proportion (in percentage) of individuals in each
type of degree obtained from the simulated sample and the data.
(A) (B)
Figure 7
𝑇𝑇𝑗0 as a Function of Unobserved Ability 𝜃 (A) and Distribution of 𝜃 (B), by Degree 𝑗 based on
Average Annual Earnings after Graduation (2009-2013) (thousands of USD)
Notes: Panel A shows the estimated treatment on treated effect for each degree (relative
to “high school diploma”) as a function of unobserved ability. Formally, let 𝑌 𝑙 = 𝑌 𝑙 (𝑥, 𝑧) denote
the outcome associated with degree 𝑙 ∈ 𝒥={two-year, four-year, high school}, where 𝑥 and 𝑧 are
realizations of the observables 𝑿 and the individual unobserved ability 𝜃, respectively. In this
figure, 𝑌 𝑙 denotes average annual earnings between 2009 and 2013 associated with degree l.
High school diploma is the baseline category. Let 𝑗 denote the first-best choice. We define Δ𝑗0 =
𝑌𝑗 − 𝑌 0 , where 𝑌 0 is the outcome associated with high school diploma (baseline category). Each
line in the left panel corresponds to a kernel-weighted local polynomial regression of the
individual-level Δ𝑗0 on 𝜃 conditional on choosing 𝑗 ∈ 𝒥. Thus, for each postsecondary degree,

panel A displays the treatment on the treated effect:
𝑇𝑇𝑗0 (𝜃) ≡ ∫ Δ𝑗0 (𝑥, 𝜃)𝑑𝐹𝑿,𝜃∣𝐷𝑗=1 (𝑥, 𝜃),
where 𝐷𝑗 equals 1 if the first-best choice is 𝑗 and 0 otherwise. We provide a 95 percent
confidence interval for each estimated curve. In this graph, we disregard observations from the
first and last percentile of the unobserved ability distribution. The right panel (B) displays the
estimated density of the unobserved ability across choices.

Figure 8
𝑇𝑇𝑗∗ as a Function of Unobserved Heterogeneity 𝜃 by First-Best Choice 𝑗 based on Average
Annual Earnings after Graduation (2009-2013)
Notes: Let 𝑌 𝑙 = 𝑌 𝑙 (𝑥, 𝑧) denote the outcome associated with degree 𝑙 ∈ 𝒥={two-year,
four-year, high school}, where 𝑥 and 𝑧 are realizations of the observables 𝑿 and the individual
unobserved ability 𝜃, respectively. In this figure, 𝑌 𝑙 denotes average annual earnings between
2009 and 2013 associated with degree l. Let 𝑗 and 𝑘 denote the first- and second-best choices,
respectively. We define Δ𝑗𝑘 = 𝑌𝑗 − 𝑌 𝑘 . Each line in the left panel corresponds to a kernel-
weighted local polynomial regression of the individual-level Δ𝑗𝑘 on 𝜃 conditional on choosing 𝑗 ∈
𝒥. Thus, for each postsecondary degree, the figure displays the treatment on the treated effect:
𝑇𝑇𝑗∗ (𝜃) ≡ ∫ ( ∑ Δ𝑗𝑘 (𝑥, 𝜃) × 𝑃𝑟[𝐷𝑘∈𝒥|−𝑗 (𝑥, 𝜃) = 1 ∣ 𝐷𝑗 = 1] ) × 𝑑𝐹𝑿,𝜃∣𝐷𝑗=1 (𝑥, 𝜃)

𝑘∈𝒥|−𝑗
where 𝐷𝑗 equals 1 if the first-best choice is 𝑗 and 0 otherwise and 𝐷𝑘∈𝒥|−𝑗 equals 1 if the
individual whose best choice is 𝑗, has a second-best choice 𝑘 We provide a 95 percent
confidence interval for each estimated curve. In this graph, we disregard observations from the
first and last percentile of the unobserved ability distribution.

Figure 9
Average Age-earnings Profiles by Type of Degree (thousands of USD)
Notes: For each age, we show the simulated average annual earnings for those individuals
optimally selecting each degree. These estimates are constructed using our estimates and the
empirical strategy discussed in section IV. Using these profiles we compute the individual-level
present value of earnings.

Figure 10
𝑇𝑇𝑗0 as a Function of Unobserved Heterogeneity 𝜃 by Degree 𝑗 based on Present Value of
Earnings (thousands of USD)
Notes: The outcome of interest, 𝑌𝑗 , is the present value of earnings associated with
degree 𝑗 (ages 18 to 65). The figure displays:
𝑇𝑇𝑗0 (𝜃) ≡ ∫ Δ𝑗0 (𝑥, 𝜃)𝑑𝐹𝑿,𝜃∣𝐷𝑗=1 (𝑥, 𝜃),
for different values of 𝜃 . 𝐷𝑗 equals 1 if the first-best choice is 𝑗 and 0 otherwise; and Δ𝑗0 = 𝑌𝑗 −
𝑌 0 . 𝑌 0 is the outcome associated with high school diploma. For a description of the empirical
strategy used to construct this figure, see Figure 7’s note. We provide a 95 percent confidence
interval for each estimated curve. In this graph, we disregard observations from the first and last
percentile of the unobserved ability distribution.

Figure 11
𝑇𝑇𝑗𝑘 as a Function of Unobserved Heterogeneity 𝜃 by Degree 𝑗 based on Present Value of
Earnings (thousands of USD)
Notes: The outcome of interest, 𝑌𝑗 , is the present value of earnings associated with
degree 𝑗 (ages 18 to 65). The figure displays:
𝑇𝑇𝑗∗ (𝜃) ≡ ∫ ( ∑ Δ𝑗𝑘 (𝑥, 𝜃) × 𝑃𝑟[𝐷𝑘∈𝒥|−𝑗 (𝑥, 𝜃) = 1 ∣ 𝐷𝑗 = 1] ) × 𝑑𝐹𝑿,𝜃∣𝐷𝑗=1 (𝑥, 𝜃),

𝑘∈𝒥|−𝑗
for different values of 𝜃. 𝐷𝑗 equals 1 if the first-best choice is 𝑗 and 0 otherwise and 𝐷𝑘∈𝒥|−𝑗 equals
1 if the individual whose best choice is 𝑗, has a second-best choice 𝑘; and Δ𝑗𝑘 = 𝑌𝑗 − 𝑌 𝑘 . For a
description of the empirical strategy used to construct this figure, see Figure 8’s note. We
provide a 95 percent confidence interval for each estimated curve. In this graph, we disregard
observations from the first and last percentile of the unobserved ability distribution.
Appendix 1
Additional Tables
Table 1.1
The Mincerian Returns to Postsecondary Degrees: Data versus Model
Variables (1) (2)
Two-year degree 0.567*** 0.467***

(0.020) (0.005)
Four-year degree 0.836*** 0.734***
(0.025) (0.006)
Five-year degree 0.855*** 0.791***
(0.021) (0.004)
Male Yes Yes

Age Yes Yes
Mother's
education Yes Yes
Family Income Yes Yes
Test scores Yes -
Unobserved
Ability - Yes
Notes: Column (1) repeats the results from Table 2 (column 5). Column (2) comes from
our simulated sample. The dependent variable is the ex-post realization of (log) annual earnings
for the 2009-2013 period. In column (1) we control for test scores (math, language and history)
and high school GPA. In column (2) we control for unobserved ability (𝜃). Standard errors are in
parentheses. *** p<0.01. ** p<0.05. * p<0.1.

Table 1.2
Goodness of Fit – Average Annual Earnings across Schooling Choices (thousands of USD)
Two- Four- Five-

High
year year year
school
Earnings degree degree degree
2009
Model 12.20 12.38 12.56 11.88

Data 12.23 12.41 12.60 11.87
p-value 0.07 0.13 0.00 0.41
2010
Model 12.49 12.71 12.94 12.03

Data 12.51 12.70 12.97 12.02
p-value 0.15 0.46 0.02 0.20
2011
Model 12.71 12.95 13.17 12.14

Data 12.71 12.95 13.19 12.15
p-value 0.72 0.68 0.03 0.74
2012
Model 12.87 13.16 13.36 12.27

Data 12.88 13.16 13.37 12.27
p-value 0.28 0.99 0.30 0.98
2013
Model 13.01 13.32 13.49 12.40

Data 13.02 13.32 13.50 12.40
p-value 0.28 0.94 0.26 0.87
Notes: We show the means of earnings by year and schooling choice from the data and
the simulated sample. In each cell we also show the p-value for a two-sample mean-comparison
test.
Table 1.3
Decomposition of Treatment on the Treated Effect based on Average Annual Earnings after
Graduation (2009 and 2013) (thousands of USD)
First Best
Second Best Two- Four- Five-
year year year
Two-year degree 2.95 -2.62
Four-year degree -2.87 -3.72
Five-year degree -2.28 0.37
Only high school 4.13 7.00 10.84
∗
Total (𝑇𝑇𝑗 ) 1.14 3.80 2.90
Notes: We show the estimated treatment on the treated based on average annual earnings
for the period 2009-2013 across first- and second-best choices. Let 𝑌 𝑙 = 𝑌 𝑙 (𝑥, 𝑧) denote the
outcome associated with degree 𝑙 ∈ 𝒥 ={high school, two-year, four-year, high school}, where x
and z are realizations of observables 𝑿 and individual unobserved ability 𝜃, respectively. Let 𝑗
and 𝑘 denote the first- and second-best choices. We define Δ𝑗𝑘 = 𝑌𝑗 − 𝑌 𝑘 . The table displays the
average treatment effects on the treated:
𝑇𝑇𝑗𝑘 ≡ ∬(Δ𝑗𝑘 (𝑥, 𝑧) ) × 𝑑𝐹𝑿,𝜃∣𝐷𝑗=1,𝐷𝑘∈𝒥|−𝑗=1 (𝑥, 𝑧)
individual whose best choice is 𝑗, has a second-best choice of 𝑘.

Table 1.4
Decomposition of Treatment on the Treated Effect based on Present Value of earnings
(thousands of USD)
First best
Second best Two- Four- Five-
year year year
Two-year degree - 103.44 -270.80
Four-year degree -99.76 - -189.30
Five-year degree -35.95 34.91 -
Only high school 322.67 419.04 573.79
∗
Total (𝑇𝑇𝑗 ) 150.75 216.90 117.12
Notes: We show the estimated treatment on the treated based on present value of earnings
(ages 18 to 65) across first- and second-best choices. Let 𝑌 𝑙 = 𝑌 𝑙 (𝑥, 𝑧) denote the outcome
associated with degree 𝑙 ∈ 𝒥 = {high school, two-year, four-year, high school}, where 𝑥 and 𝑧
are realizations of the observables 𝑿 and the individual unobserved ability 𝜃. Let 𝑗 and 𝑘 denote
the first- and second-best choices. We define Δ𝑗𝑘 = 𝑌𝑗 − 𝑌 𝑘 . The table displays the average
treatment effects on the treated:
𝑇𝑇𝑗𝑘 ≡ ∬(Δ𝑗𝑘 (𝑥, 𝑧) ) × 𝑑𝐹𝑿,𝜃∣𝐷𝑗=1,𝐷𝑘∈𝒥|−𝑗=1 (𝑥, 𝑧)
individual whose best choice is 𝑗, has a second-best choice of 𝑘.

Table 1.5
Estimated Treatment on the Treated Effect Based on Present Value of Earnings, Assuming 𝑇 =
55
𝑇𝑇𝑗0 (thousands of
313.94 381.33 451.81
USD)
[309.07, 318.81] [377.53, 385.13] [450.22, 453.40]
𝑟𝑗0 × 100 137.84 172.04 199.79

[136.17, 139.51] [170.86, 173.21] [199.30, 200.28]
Pr(𝑟𝑗0 < 0) × 100 0.71 0.00 0.00

[0.55, 0.88] - -
Pr(𝑟𝑗0 < −0.1) × 100 0.43 0.00 0.00

[0.30, 0.55] - -
𝑇𝑇𝑗∗ (thousands of
141.14 181.07 71.73
USD)
[136.22, 146.07] [176.26, 185.88] [66.32, 77.14]
𝑟𝑗∗ × 100 63.55 76.13 83.50

[61.85, 65.24] [74.17, 78.10] [82.29, 84.71]
Pr(𝑟𝑗∗ < 0) × 100 32.97 17.88 39.44

[32.07, 33.87] [16.92, 18.83] [38.92, 39.96]
Pr(𝑟𝑗∗ < −0.1) × 100 25.53 7.65 30.13

[24.69, 26.36] [6.99, 8.32] [29.64, 30.61]
in brackets. Let 𝑌 𝑙 = 𝑌 𝑙 (𝑥, 𝑧) be the economic benefit of degree 𝑙 ∈ 𝒥 = {high school, two-year,
four-year, high school}, where 𝑥 and 𝑧 are realizations of the observables 𝑿 and the individual
unobserved ability 𝜃, respectively. In this table, 𝑌 𝑙 corresponds to the present value of earnings
(age 18 to 55). High school is defined as the baseline category (𝑗 = 0). Let 𝑗 and 𝑘 denote the
first- and second-best choices. Pr(𝐴) denotes the probability of event 𝐴. Panel A (B) presents
treatment on the treated estimators on first-best choice versus high school (second-best choice).
For Δ𝑗0 = 𝑌𝑗 − 𝑌 0 and Δ𝑗𝑘 = 𝑌𝑗 − 𝑌 𝑘 , we calculate the average treatment effects on the treated
as:

𝑘∈𝒥|−𝑗
𝑌𝑗 ⁄𝑌 0 − 1 and 𝑌𝑗 ⁄𝑌 𝑘 − 1 instead of Δ𝑗0 and Δ𝑗𝑘 .

1. According to statistics from the Organization for Economic Co-operation and
Development (OECD), between 1998 and 2010, the number of students in tertiary education
increased by 53 percent in the United States, 46 percent in Australia, and 65 percent in Mexico.
In China the figure has soared to more than 31 million in 2010, up from 23 million students in
2005 (National Bureau of Statistics of China), with the numbers of private universities increasing
from 20 in 1997 to 630 in 2010 (Center for International Higher Education at Boston College).
2. In the US, the risk of unemployment varies by type of degree: in 2011, the average
unemployment rate for 25-64 year-olds for tertiary degrees type A (professional degrees) and
type B (technical degrees) were 4.4 and 6.5 percent, respectively (OECD, 2013). Furthermore,
according to data from the Integrated Postsecondary Education Data System (IPEDS), the
average published tuition and fees at public four-year colleges and universities in the US
increased by 31 percent beyond the rate of inflation over the five years from 2002 to 2007, and
by another 27 percent between 2007 and 2012. Finally, two-thirds of U.S. college seniors
graduated in 2011 with an average student loan debt of $26,600, a 5.3 percent increase relative to
2010 (Project on Student Debt).
3. For a review of evidence on returns to education in Latin America see Behrman,
Birdsall, and Szekely (2007); Manacorda, Sanchez-Parama, and Schady (2010); Lopez-Calva
and Lustig (2010); Bassi, Busso, Urzúa, and Vargas (2012). For Chile see Contreras, Melo, and
Ojeda (2005); Meller and Rappoport (2008); and Rau (2013).
4. The number of postsecondary institutions in Chile rose from eight universities in 1980
to more than 150 institutions in 2008. Also, the reform had an enormous impact in enrollment.
Between 1984 and 2009, the enrollment in postsecondary institutions grew almost 363 percent
(from 189,151 to 876,243 students).

5. Following the International Standard Classification of Education used by the OECD,
five-year degrees in Chile correspond to Tertiary-type A programs, namely, programs that
prepare students in high-skill professions and provide the sufficient set of tools for continuing
more advanced graduate programs. Two-year degrees correspond to Tertiary-type B programs
such as vocational and technical degrees. Four-year degrees can be considered as a middle
ground between Type-A and Type-B degrees.
6. According to data from the Chilean Ministry of Education, between 2005 and 2013,
average nominal tuition costs increased by 66.8, 33.1, and 57.8 percent among two-, four-, and
five-year degrees, respectively.
7. Private universities receiving public funding and public universities require a minimum
score of 450 in the PSU during the admission process. However, the majority of universities in
the country (mostly private) as well as technical and professional institutes do not use minimum
scores.
8. These PSU cutoffs, which are required to be admitted in the most selective
degrees/universities, motivate the regression discontinuity (RD) strategy used in Hastings,
Neilson, and Zimmerman (2013). The RD approach identifies the local return to a specific career
(not degree) for those individuals above and below the cutoff. However, the interpretation of this
parameter is not trivial given that those with scores below the cutoff could select any of the
thousands of available options. Our paper seeks to trace out the distribution of returns to
education across a limited set of degrees (not careers), focusing on well-defined factual and
counterfactual decisions.
9. Due to the large heterogeneity of the supply side, low-performing students can enroll
in less-selective institutions. In this paper, we do not analyze the decision of selecting a
particular institution or a career within an institution. This would require modeling individual
decisions across the 8,409 postsecondary programs available in Chile in 2008 (1,734 two-year
programs, 2,467 four-year programs, and 4,208 five-year programs). This is beyond the scope of
this paper and it explains why we focus on the decisions across types of degrees.
10. As described in section III.E, we analyze administrative academic records from the
total population of graduates from higher institutions in Chile. This information contains
standardized test scores, high school GPA and socioeconomic variables for individuals who
graduated from postsecondary institutions in 2008. Our sample includes individuals obtaining
two-year degrees, four-year degrees and five-year degrees. Additionally, we have information on
individuals who took PSU in 2007 and decided not to enroll in postsecondary institutions in 2008
or 2009. This sample defines the baseline category in Table 2. We link the academic records to
annual earning information from 2009 to 2013.
11. See Heckman, Lochner, and Todd (2008) for a precise discussion of the assumptions
behind the Mincer model and their empirical justification.
12. See Willis and Rosen (1979), Cameron and Heckman (1998 and 2001), Carneiro,
Hansen, and Heckman (2003); Cameron and Taber (2004); and Cunha, Heckman, and Navarro
(2005) for models with similar characteristics.
13. We exclude from our model schooling decisions beyond postsecondary degrees and
any possibility of dropping out after enrolling. According to CASEN 2009 (a nationally
representative household survey) 24 percent of individuals ages 24 to 30 ended up dropping out
of postsecondary education. Under the assumption that conditional on observed and unobserved
characteristics dropping out is exogenous, our estimates of the returns to postsecondary degrees
should remain unbiased. On the other hand, among the group of 24 to 30 year olds with a
postsecondary degree, only 10 percent pursue graduate studies, but most of them are part-time
programs.
14. We interpret this one-dimensional factor, 𝜃, as a manifestation of individual’s
cognitive and socio-emotional ability (Heckman, Stixrud, and Urzúa 2006).
15. Our linear-in-the-parameters structure follows Eckstein and Wolpin (1989) and
Cameron and Heckman (2001). It indirectly captures the option values associated to each choice
and the effects of short- and long-term credit constraints without specifying the structure of
credit markets. However, it imposes strong functional form assumptions, which limit its
“structural” interpretation. For example, a full dynamic model would require a non-linear
specification for 𝑉𝑗 . In this context, the assumed structure is not intended to be a precise
approximation to the dynamic discrete choice model but a starting point. Cunha, Heckman, and
Navarro (2007) discuss conditions under which dynamic discrete choice problems can be
represented with simpler multinomial models.
16. This point is discussed in Heckman, Humphries, Urzúa, and Veramendi (2014).
17. Under the assumption that 𝜃 is known to the agent, its associated coefficients in
earnings and schooling choice equations should be different from zero. Section IV presents
formal test for this hypothesis.
18. Given a specific degree type, individuals could enroll into different careers, fields or
disciplines (social sciences, biological sciences, computer science, etc.). To the extent our
schooling decision model captures the selection into types, and our labor market equations
capture the heterogeneity between and within degree types, the selection into disciplines should
not affect our identification strategy and the interpretation of our findings.
19. Using a similar approach, Cooley, Navarro, and Takahashi (2007) show that the
identification of a single-factor model can be obtained using two test scores.
20. See for example Aakvik, Heckman, and Vytlacil (2005).

21. By allowing for 𝑉𝑗 to include “psychic costs,” the literature has also rationalized
models in which individuals make optimal decisions based on expected net utility, but may not
make the best financial decision (Cunha, Heckman, and Navarro 2005). In practice though,
psychic costs are estimated as a residual, limiting their economic interpretation. For example,
differences between 𝑌̃ 𝑗 and 𝑉𝑗 could be due to risk aversion if there is not full insurance, and
systematic and non-systematic forecasts errors. Cunha, Heckman, and Navarro (2006) find that
non-systematic forecast errors explain only a small portion of the gap between 𝑌̃ 𝑗 and 𝑉𝑗 in the
United States. Only a model with stronger structural assumptions could identify and disentangle
the underlying factors behind psychic costs. This type of exercise is beyond the scope of this
paper.
22. According to the Chilean Bureau of Statistics, average monthly employment in the
country was 7.7 million in 2013, therefore, in practice we count with information for all formal
workers
23. The number individuals that obtained a postsecondary degree in 2008 is 50,041. On
the other hand, 51,031 individuals participated in the college admission process in 2007 but did
not enroll in any postsecondary institution in 2008 or 2009. After deleting observations with
missing information on exogenous controls and monthly earnings, we end up with an overall
sample of 54,242 individuals.
24. We do not have information on high school graduates who did not take PSU. Official
statistics indicate that out of 215,906 students attending the last year of high school in 2007,
172,728 took the college admission exam the same year. To the extent that these individuals
have lower levels of skills and earnings, our estimated treatment effects based on “high school
diploma” as baseline category should be interpreted as lower bounds.

25. Each agent in our model selects the degree that maximizes her expected utility. We
assume that in forming these expectations she uses all available information. In this way, recent
high school graduates should consider the labor market outcomes of recent college graduates to
decide whether or not to continue their education. This logic justifies our control group in the
context of our choice model. However, we recognize that using this control group might lead to
underestimating the counterfactual labor market outcomes of college graduates as high school
graduates, overestimating the average returns to postsecondary education 𝑇𝑇𝑗0 . This should not
affect our estimates of 𝑇𝑇𝑗∗ . An alternative analysis based on different control groups would
require information on high school graduates from previous years never enrolled in post-
secondary education. Unfortunately, to the best of our knowledge, this data does not exist.
Furthermore, this approach would add additional complexity, since any comparison would
critically depend on both the duration of the degree and the specific cohort of high school
graduates considered as control group.
26. As explained in section III.C, the number of test scores determines how many latent
factors can be identified. In particular, with a set of four test scores we can non-parametrically
identify the distribution of a single factor (the identification of a two factor model would require
five test scores) (for further details, see Carneiro, Hansen, and Heckman 2003). In this context,
and given the nature of the available test scores, we interpret 𝜃 as a combination of the latent
abilities determining academic achievement as measured by PSU and high school GPA.
27. In principle, PSU scores might directly impact individual valuations of each post-
secondary degree, and so, they could be included as controls in the choice equations. Our model
is not inconsistent with this logic. Even though we cannot directly control for PSU in the
multinomial model –the set of observed explanatory variables must be independent of the latent
factor 𝜃– we include most of the variables determining PSU test scores as controls into the
choice equations. Therefore, we interpret choice equations as reduced-form expressions (after
including PSU scores into the multinomial model), and their coefficients as capturing both the
direct effects of observed variables and unobserved ability and their indirect effects coming from
the variation in PSU scores.
28. This strong assumption implies that 𝜃 must be interpreted as the inherited ability
orthogonal to observed characteristics.
29. These functional form assumptions are common in the empirical literature analyzing
factor models. See for example Hansen, Heckman, and Mullen (2004).
30. For more details see Carneiro, Hansen, and Heckman (2003) and Heckman, Stixrud,
and Urzúa (2006).
31. The distinction between unobserved ability and test scores can also be illustrated in
the context of the Mincer regressions. Table 1.1 in the appendix compares the estimates from
two Mincer earnings regressions (see equation 1). Column 1 repeats the results displayed in
Table 2 (column 5). Column 2 presents similar results but obtained using the simulated sample
from our model of counterfactual labor market outcomes (equation 3). As in the case of Table 2,
the dependent variable is the log of average annual earnings between 2009 and 2013. The
controls include gender, age, mother’s education and family income. The results indicate that the
Mincerian returns are overestimated when using observed test scores as opposed to 𝜃.
32. The large fraction of the variance explained by the error term might due to the nature
of high school GPA. For example, better high schools could systematically give lower grades to
their students. This would reduce the correlation between grades and PSU test scores, resulting in
a smaller fraction of the variance explained by common observed characteristics and latent
ability.
33. We allow the direct costs differ across different types of institutions, so the
experiments modify the relative costs.
34. The estimated impact of tuition reductions on postsecondary graduates may constitute
a lower bound as the decision to take the college admission test might be correlated with college
tuition, an important channel our model does not consider. The same logic suggests that the large
estimated reduction for two-year institutions graduation rate should be interpreted as an upper
bound.
35. The estimated coefficients associated with tuition costs in the choice equations
capture demand and supply factors in a partial-equilibrium reduced-form fashion. This feature
precludes from constructing a clean experiment: holding constant tertiary institutions behavior
while varying tuition costs. This might explain the positive marginal effects of tuition costs for
the two- and four-year reported in Table 7, which leads to the prediction that some individuals,
who originally choose two- or four-year, opt for high school diploma once tuition is lowered.
36. Among those choosing any of the postsecondary degrees, a large fraction of
individuals also reports “high school diploma” as a second-best option: 54.7, 43.7 and 43.3
percent for two-, four-, and five-year degree holders, respectively. This result suggests that there
might be small welfare gains attached to the other available post-secondary alternatives.
Uncovering the channels behind this result is outside the goal of this paper. However, the fact
that different types of post-secondary degrees might require different abilities, which might be
costly to acquire, can explain the phenomenon. This mechanism is consistent with the main
hypothesis of this paper.
37. Negative economic returns to education have been interpreted in the literature as
evidence of “psychic costs” (Cameron and Heckman 2001; Cunha, Heckman, and Navarro
2005). We are cautious about inferring what is the precise mechanism generating negative
returns (for example, misinformation or psychic benefits), but by documenting the importance of
formally defining the choice model, in particular, the characteristics of the second-best
alternative, we provide a new perspective to this issue.
38. Conceptually, the strategy to predict earnings can be rationalized within our economic
model as follows. At the time the agent is solving the multinomial choice problem, she uses the
data generating process to predict the stream of future earnings associated to each degree 𝑗. To
𝑦
do so, and given the uncertainty regarding the parameters’ dynamics, she approximates 𝐸[𝛼𝑗,𝜏 ∣
𝑦
Ω] for any 𝜏 and 𝑗 using a non-linear function of 𝑡. We assume 𝐸[𝛼𝑗,𝜏 ∣ Ω] = 𝑎𝑗 + 𝑏𝑗 ln(𝜏).
39. As a reference, between 2006 and 2012, the real interest rate of the State Guaranteed
Loans (the most important higher education loan program in Chile) was 5.8 percent.
40. Table 1.5 in the appendix shows the analogous calculations assuming 𝑇 = 55. The
estimates from this table confirm that our results are robust to changes in 𝑇.

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Rodríguez, Urzúa, and Reyes 1

Heterogeneous Economic Returns to Postsecondary Degrees:

We analyze the economic returns to postsecondary degrees in Chile. We posit a schooling

significant heterogeneity. We document how unobserved characteristics (ability) determine the

this phenomenon by estimating heterogeneous treatment effects across postsecondary degrees

We study Chile’s highly competitive postsecondary education system. The country is

the postsecondary educational systems in developed and other developing countries.

The empirical strategy is implemented with longitudinal data containing administrative

administrative registers of earnings.

allowing for heterogeneity across degrees.

We document substantial heterogeneity in the economic returns to postsecondary

estimated treatment effects based on first-versus second-best alternatives, we find a significant

higher education systems. By focusing on types of degrees, we highlight the challenges of

II. The Postsecondary Education System in Chile

this paper we examine the economic returns to each of these alternatives.5

systems in other developed and developing countries.

In Chile, access to postsecondary education is merit-based. Students who wish to attend

college admission exam.7,8

though access to postsecondary education is merit-based, in practice low-PSU scores do not

The sorting proﬁle is also strongly inﬂuenced by students’ socioeconomic background.

postsecondary degrees. Figure 2 analyzes administrative information on earnings by type of

following regression model:

(1) ln 𝑤𝑖 = 𝑋𝑖′ 𝛽 + 𝑇𝑖 ′ 𝛿 + ∑ 𝛾𝑠 𝐷𝑖,𝑠 + 𝑢𝑖

more detail in section III.E.10

degrees (columns 4 and 5).

However, to interpret these estimates as the causal effects of postsecondary degrees on

that selection is based exclusively on observed characteristics: conditional on observed test

of returns.11 As Table 3 shows, tuition costs can be substantial. Consequently, we follow a

III. The Economic Model and Empirical Strategy

In this section, we posit a model of unordered schooling decisions. Conditional on her

as monetary and psychic costs.

We supplement this framework with a model of labor market outcomes (earnings) by

unobserved characteristics. Unobserved components, which we interpret as latent ability,

A. The Multinomial Choice Model

independent of 𝜈𝑘𝑉 with 𝑗, 𝑘 ∈ 𝒥 and 𝑗 ≠ 𝑘.

Equation (2) can be interpreted as a reduced-form approximation of the individual’s value

Conditional on individual characteristics, degree choices are unordered. More precisely,

agents choose the alternative that yields the highest utility:

𝑙 ∗ = arg max ∗ {𝑉𝑘 },

Let 𝐷𝑗 denote an indicator function for option 𝑗 ∈ 𝒥 deﬁned as:

We utilize 𝐷𝑗 to deﬁne the treatment effects of postsecondary degrees. Finally, we

alternative (𝑗 = 0), we assume 𝑆0 = 0, whereas 𝑆𝑗 > 0 for the other options.

B. Labor Market Outcomes

characterize the associated individual-level earnings proﬁle as

𝑦𝑗 (𝑡) = 0 for 0 < 𝑡 ≤ 𝑆𝑗 , and

𝑦𝑗 (𝑡) ≥ 0 for 𝑆𝑗 < 𝑡 ≤ 𝑇,

where T is the retirement period (common to all individuals).

observed characteristics as well as unobserved ability as follows:

economic returns to postsecondary degrees.

Finally, we use a conventional switching regression framework to deﬁne observed

earnings 𝑦(𝑆𝑗 + 𝜏):

𝑦(𝑆𝑗 + 𝜏) = ∑ 𝐷𝑗 × 𝑦𝑗 (𝑆𝑗 + 𝜏) 𝜏 > 0.

C. Measurement System for Unobserved Endowment

outcomes hinges on the identiﬁcation of the distribution of unobserved ability 𝜃, 𝑓𝜃 (∙). We

Let 𝑻 be a vector of individual-level test scores of dimension 𝑑 𝑇 , observed before the

equations of the form:

between test scores and 𝜃 supports our interpretation of 𝜃 as latent ability.

the distribution of 𝜃 can be non-parametrically identiﬁed up to a normalization of a single

further details on the identifying assumptions of discrete-continuous factor models of

D. The Returns to Postsecondary Degrees

We focus on the impact of postsecondary degrees on labor market outcomes. In what

Treatment effects. Let 𝑌𝑗 be the outcome of interest associated with degree 𝑗 ∈ 𝒥. We

is defined at the individual-level as: