Heterogeneous Returns to College Quality and the Value of Graduate Degree Attainment

Existing studies on the returns to college quality find mixed results, mainly due to the difficulty of controlling for selection into higher quality colleges based on unobserved abilities. Moreover, researchers have not considered graduate degree attainment in the analysis of labor market returns to college quality. I examine how college quality affects wages and advanced degree attainment using the factor structure model of Carneiro, Hansen, Heckman (2003). I apply the factor structure model to be used with two datasets both of which are required for identification of the model parameters. The results show that graduating from a college of 1 standard deviation higher quality leads to a 2% higher hourly wage 10 years after college graduation. I further decompose the college quality return into two parts: the direct return to a bachelor’s degree (and no advanced degree) and the expected return to a graduate degree. Estimates of the former are positive but the latter is negative. This negative correlation between college quality and the expected graduate degree returns is driven by medical and doctoral degrees. For MBAs, law school, and engineering M.S.s, the gradient is positive. I also find that returns to college quality are the same across individuals. Only math ability and graduate degrees are complements. ∗Email: [email protected] †I would like to thank Christopher Taber, John Karl Scholz, Jane Cooley Fruehwirth, Salvador Navarro, and Yuya Takahashi for helpful guidance and invaluable advice. All errors are of my own.