Karl has a post earlier today where he makes the case that the “love hypothesis” broadly explains trends we see in k-12 education. Specifically, that we school children in ways that show we care, rather than ways that maximally benefit children. However, he then brings up that this wouldn’t explain rising student debt:

What the love hypothesis doesn’t explain is rising student debt. Why are the students themselves taking on ever larger burdens. Is it so they can prove that they love themselves? That’s not totally implausible, but out the gate it doesn’t seem very compelling.

Fortunately, we don’t have to shoehorn the love hypothesis to fit. This is a kind of a form of the principal-agent problem…although not so much a “problem” per se. When children are the agents, and parents are the principals, then parents spend money in the ways that they see fit, which explains how the love hypothesis would provide a transmission mechanism from what parents spend into the type and amount of schooling that children receive, even if children (agents) aren’t really getting much out of it at the margin.

However, student loans are an example of the principal and the agent being the same person. Students are largely mortgaging their own futures in order to increase their marginal productivity. Thus they don’t need to love themselves, that explains why people spend money on other people’s education (indeed, it explains the skyrocketing tuition at ivy league schools, where parents do pay the bills many times).

I like to explain rising student debt (and thus, greater consumption of higher education) using education as a network good. Network goods are characterized by two concepts that would illuminate this: knock-on and tipping points. Put simply, if no one had a bachelor’s degree, no one would need a bachelor’s degree. On the other side of the coin, if everyone has a bachelor’s degree, then you are locked out unless you get one. The more people that have bachelor’s degrees, the more useful they are to those who possess them, until the network reaches a tipping point where employers begin preferring bachelor’s degrees, on to a point where employers require a bachelor’s degree. That pushes people into the market for master’s degrees, rinse and repeat. This could likely go on forever in an with infinitely-lived agents, and infinite degree successions.

Or maybe I’m just too dead tired to reason well today.

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