Human capital attainment, university quality, and entry-level wages for college transfer students.

• Author: Hilmer, Michael J.

1. Introduction

   The U.S. higher education population is highly mobile. Tinto (1987) finds that roughly 35% of college graduates from the National Longitudinal Study of the High School Class of 1972 graduate from a different institution than the one they first attend. Recent evidence suggests that the percentage of college attendees choosing to transfer is on the rise. For instance, a U.S. Department of Education survey of 1992 college graduates finds that over half of the roughly 11,000 students interviewed had attended more than one institution during their college careers (National Center for Education Statistics 1996). Despite their obvious place in American higher education, very little is known about college transfer students. The economics of higher education literature has devoted much attention to the economic returns to college attendance and the causes and consequences of college dropouts. Within the vast literature, however, the transfer student has largely been neglected.

   This is particularly regrettable, as transfer students present the researcher with additional, potentially valuable information that nontransfers do not. In particular, transfer students will have taken courses at more than one quality institution. This fact can possibly be exploited to provide insight into the role of human capital accumulation in determining a student's postgraduation earnings. A common problem in the economics of higher education literature is that the well-known positive return to the quality of university from which a student graduates is predicted by both human capital and screening theories (for a more detailed discussion, see Weiss 1995). Much of this confusion may be based on the fact that previous studies have focused only on graduation quality. While such an approach is accurate for nontransfers, it is not accurate for transfer students. Transfer students clearly complete courses at institutions that are of different qualities. The human capital theory has implications for the pre dicted returns to initial quality and tenure for transfer students, while the screening theory does not. Thus, the returns to initial quality and tenure may be used to generate some idea which model more accurately describes the role of educational attainment in determining a student's entry-level earnings.

   This study is one of the first to separately examine the economic returns to college attendance for transfer students. In particular, I focus on the returns to quality and educational tenure at institutions other than the one from which a transfer student graduates and ask what implications such values have for human capital theory. A theoretical discussion describes how the educational experiences of college transfer students can be used to address the role of human capital accumulation in determining a college graduate's entry-level earnings. Specifically, to be consistent with human capital theory, the quality of all institutions attended should have positive effects on future earnings, while the length of time spent at each institution is uncertain. The longitudinal nature of the data set analyzed allows me to improve the efficiency of my estimates by employing panel data techniques. Using random effects generalized least squares (GLS), I find significant, positive, and statistically similar returns to b oth initial and graduation quality and insignificant effects for both initial and graduation tenure. In other words, by finding that both initial and graduation quality have significant positive effects on future earnings, the results can be considered consistent with the predictions of the human capital theory.

2. Theory

   To frame the empirical work here, I start by developing a simple model of college choice. In choosing a college, the prospective student has thousands of options to consider. This choice set will differ for each student as it is limited to only those colleges to which he or she is able to gain admission. Each college presents the student with a different combination of quality and cost. A college is an efficient option if no other college offers a higher quality at a lower cost. The student limits his or her search to these efficient options. From this efficient set, the student chooses the level of quality and implicitly the particular university that results in the highest total utility. If this value exceeds that which could be received in the labor market, the student chooses to attend the university. If it is less, he or she forgoes college attendance and enters the labor market directly...

   To formalize the student's college choice, assume there are two distinct periods representing the college and postcollege years. (1) The student's objective is to maximize the utility he or she receives from consumption in the two periods. Each student enters the first period with a fixed amount of family wealth, M, which is allocated between current consumption, [X.sub.1], and the cost of college attendance. Let Q represent the quality of university from which the student graduates and let C represent the cost per unit of quality. (2) Finally, if the student chooses not to exhaust his or her first period wealth, he or she saves the remainder, at interest rate r, for use in the second period.

   The student is able to work for k years during the second period. A student's future earnings will depend on the quality of university he or she attends. (3) Let f(Q) represent the student's postgraduation earnings function. In addition to earned income, the student receives interest payments on any money saved during the first period. The sum of these two incomes is spent on second-period consumption, [X.sub.2].

   The optimization problem facing the university-bound student is

   subject to [Max.sub.[X.sub.1],[X.sub.2],Q] U([X.sub.1], [X.sub.2]) [X.sub.1] + CQ [less than or equal to] M [X.sub.2] = f(Q) * k(1 + r)[M - C(Q) - [X.sub.1]]. (1)

   The solution to this optimization problem yields a familiar system of Kuhn-Tucker conditions. (4) These conditions indicate that a student chooses his or her optimal institution by equating the marginal return to college quality to the marginal cost. As the marginal benefit of college quality depends on the effect that college quality has on a student's future earnings, the specification of the earnings function is of primary importance to a student's decision. Consequently, the work here focuses on the role that college quality plays on a student's future earnings.

   Unfortunately, the student's problem is not necessarily as simple as specified in Equation 1. Graduation from college is an uncertain event. Simply gaining admission and enrolling at a particular institution does not guarantee that a student will one day complete the requirements for a degree at that institution. On graduation from high school, neither colleges nor students are certain whether students have the ability and/or desire to persist to graduation. Thus, it is reasonable to assume that substantial mismatching exists between students and first-choice colleges. In a nontransfer world, students who decide to attend a particular institution must either persist to graduation at that institution or drop out without receiving a degree. In a transfer world, students who are initially overmatched and do not meet the requirements at their first-choice institutions can transfer to lower-quality institutions rather than dropping out. (5) Likewise, students who are initially undermatched and far exceed the requi rements at their first-choice institutions can transfer to higher-quality institutions.

   Consider the difference between the earnings function for a student who transfers from his or her initial-quality institution to a different-quality institution. This student will not have one fixed quality, as specified in Equation 1, but rather he or she will have different qualities for all institutions attended. Let [Q.sup.G] represent the quality of university from which the student graduates and let [Q.sup.T] represent the quality of university from which the student transfers. In addition to the different qualities, the student will have different tenures at each of the different institutions. To account for this, let [[alpha].sup.T] the percentage of total credits spent at the initial institution. The postgraduation earnings function for a transfer student is then

   f([Q.sup.G], [Q.sup.T], [[alpha].sup.T]), (2)

   as presumably the qualities and tenures of all institutions will affect a student's future earnings.

   An important question is how the different qualities and tenures at each institution affect a student's future earnings. By examining only the quality of university from which a student graduates, previous studies (Wales 1973; Solmon and Wachtel 1975; Wise 1975; James et al. 1989; Mueller 1988; Rumberger and Thomas 1993) have implicitly treated the transfer student's earning function as specified in Equation 1 rather than Equation 2. As such, they have ignored the potentially important effect that initial quality and tenure may have on postgraduation earnings.

   The additional information to be gained by controlling for a transfer student's entire educational background may provide insight into important economic questions. For example, human capital attainment is a cornerstone of much of the economics of education literature. According to the human capital theory of Becker (1964), the oft-cited positive return to a college education (recent examples include Katz and Murphy 1992, Murphy and Welch 1992, and Kane and Rouse 1995) results from the increased human capital attained through college attendance. A natural extension of this argument is that students who attend higher-quality universities accrue higher levels of human capital and should receive higher wages on graduation (this argument is supported by Psacharopoulos 1974). Indeed, James et al. (1989), Rumberger and Thomas (1993), and many others find a...