Higher-Order Risk–Returns to Education

Abstract

In the traditional human capital framework, education is often considered as an investment, rather than consumption, while consumption is not necessarily precluded. Whether education is an investment is empirically unclear and relatively under-explored. We shed light on this issue by estimating the risk–return trade-off in the context of education. If education is indeed an investment, risk could play an important role in individual educational decisions just as with risky assets. As portfolio theory predicts, there could be a trade-off between returns to education and risks concerning those returns: higher risks are generally associated with higher returns. We contribute to the literature by proposing various measures of risk based on the entire distribution of returns to education recovered by our nonparametric models. Our results confirm a trade-off between returns and variance. We also found statistically significant impacts for the higher moments: skewness and kurtosis. Interestingly, we found the relationship between mean returns and variance to be linear, and the relationship between expected returns and higher-moments (skewness and kurtosis) is non-linear.