University Choice: The Role of Expected Earnings, Non-pecuniary Outcomes and Financial Constraints

We investigate the determinants of students’ university choice in Pakistan, with a focus on monetary returns, non-pecuniary factors enjoyed at school, and financial constraints. To mitigate the identification problem concerning the separation of preferences, expectations and market constraints, we use rich data on subjective expectations, with direct measures of financial constraints, to estimate a life-cycle model of school choice jointly with school-specific expectations of dropping out. We find that labor market prospects play a small role. Instead, non-pecuniary outcomes, such as the school’s ideology, are the major determinants. Policy simulations suggest that relaxing financial constraints would have large welfare gains.