MACRO: The Macroeconomic Cost of College Dropouts; Dr Oliko Vardishvili (University of California, Irvine)

Abstract

Forty percent of US college students drop out. I analyze a novel policy-relevant dropout channel: grant uncertainty across academic years that students face at college due to the opaque allocation process of grants. Using a quantitative overlapping generations equilibrium model, I analyze the impact of uncertainty regarding grants, together with uncertain academic ability and productivity shocks, on dropout rates. Grant uncertainty alone explains one-third of dropouts, disproportionately affecting economically disadvantaged high-ability students. Reducing this uncertainty improves social welfare by 2.4% through the complementarity between ability and a college degree, benefiting both graduates and non-graduates by reducing skill premiums and taxation.

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