Returns to and Option Values of Majoring in Business and Engineering

• In Event: Non-Traditional Postsecondary Pathways, Quality Signals, and Labor Market Returns

Abstract

We estimate the returns to majoring in business and engineering, and compute the share of the returns that comes from the option value of graduate school. Our empirical strategy leverages GPA cutoffs for internal transfer into business and engineering and a fuzzy regression discontinuity (RD) design. Essentially, we compare students who just crossed the GPA cutoffs and majored in business and engineering to students who just missed the GPA cutoffs and did not major in business and engineering. Crucially, we leverage students' course selection to help identify students who are likely interested in applying for internal transfers into the business and engineering majors.

We estimate that the returns to majoring in business and engineering are 0.13 and 0.28 log points, respectively. We find significant heterogeneity in the returns. We find that students in more selective institutions gain a higher return to majoring in business. Compared to male students, female students have a higher return to majoring in business, although the difference is not statistically significant. As for engineering, we also find that females gain higher returns to majoring in engineering.

To examine the option values of majoring in business and engineering, we estimate the effects of majoring in business and engineering on college and graduate degree attainment. Examining degree attainment four-years after junior year, we find that majoring in business and engineering both increase the likelihood of attaining any college degree. Examining on-time graduation, majoring in business increases the likelihood of attaining any college degree while majoring in engineering substantially decreases the likelihood of attaining any college degree. The effects on graduate degrees (eight years after junior year) show substantial difference between the two majors. Majoring in business increases the chance of attaining a graduate degree while majoring in engineering decreases the chance of attaining a graduate degree by 0.06 (0.03).

Finally, we calculate the present discounted values (PDV) of majoring in business and engineering. To do so, we compute the weighted average of net income across all possible outcomes from 2 to 39 years after junior year. PDVs are calculated under three scenarios to examine the option values of graduate degrees. The first scenario is the counterfactual scenario, where we use the probabilities of outcomes from students who did not major in business or engineering. The second scenario is the actual scenario, where we use the probabilities of outcomes from students who majored in business and engineering. The third scenario is what we call the actual college scenario, where we take the probabilities of college enrollment and college degree attainment from the actual scenario, but take the probabilities of graduate enrollment and graduate degree attainment from the counterfactual scenario. The third scenario allows us to isolate the option values that come from graduate school. We find that the option value from graduate school represent a much larger share for the PDV gains from majoring in business (23%) than that from majoring in engineering (6%).

Author

• Zhengren Zhu, Vassar College
  Presenting Author