Bryan Caplan  

Reply to Noah on Sheepskin Effects and Collegiate Consumption

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Continuing our debate, Noah Smith defends on odd view on sheepskin effects.  Here's my reply.  He's in blockquotes; I'm not.

Bryan, and many proponents of the signaling model, believe that sheepskin effects are solid evidence that college is mostly about signaling. On the other hand, I believe that sheepskin effects are strong evidence against the signaling model, and are consistent with the human capital model of education. 

Why sheepskin effects are evidence against the signaling model

First, why are sheepskin effects evidence against the signaling model? Simple: In the signaling model, the signal must be costly. If signals are not costly, there can be no separating or hybrid equilibrium. Without a separating (or hybrid) equilibrium, there is no return to sending the signal. In the model, low-type agents choose not to send the signal because doing so doesn't pass a cost-benefit test.

In other words, if completing the last semester of college is very hard, it can serve as the type of costly signal that could explain the college wage premium in the signaling model. But if completing one more semester of college isn't very hard, then the signaling model can't describe what's going on.

How hard is it to finish the last semester of college? For some people it would be very very hard - but these people are unlikely to have completed all the other semesters of college prior to the last one. For someone who just finished 7 or more semesters, one more semester probably is not that hard.
If you knew nothing about actual students on actual college campuses, Noah's argument would be highly plausible.  Since both of us have spent many years on such campuses, however, I'm puzzled.  Plenty of kids slog through two or three years of college, then get so distracted or disgruntled they fail to finish.  Their exasperated parents could reasonably say, "How hard can it possibly be to finish?!"  But social scientists should just work our way backwards from their failure to finish to the subjective difficulty of doing so.

By analogy, imagine you have a lonely friend.  He desperately wants a girlfriend, but never asks anyone out on a date.  You tell him: "It's easy.  Just walk up to her and ask her out.  End of story."  And what does he say?  "Sure, it's easy for someone like you..."  The difficulty of finishing a degree is much the same.
Also, if agents are even close to rational - as the signaling model assumes them to be - then they wouldn't complete 7 semesters of college only to balk at the finish line. That would be very very suboptimal behavior - a waste of years of effort and years of foregone earnings, not to mention tuition.
Noah's right that conventional signaling models assume everyone's rational.  But they don't need to.  As long as employers are roughly rational, students can act impulsively without changing the main lesson of the model: Education pays you for what you reveal about yourself, rather than what you actually learn along the way.  In fact, rationality is one of the traits students signal with their behavior!  The more rationally you act, the more rational you're likely to be.  
Caplan writes:
Noah fail[s] to look at school from the point of view of a weak student.  One more semester may seem like nothing to those of us who readily finish.  But for students who find classes boring and baffling, even the thought of enduring even one more semester of academics is agonizing.  
Agonizing, perhaps, but much more agonizing than the last 7 semesters? It seems highly unlikely. And why would a rational agent endure 7 semesters of agony (and foregone earnings and sky-high tuition) for practically no payoff?
Forget models and look at actual human beings.  Plenty of people will put up with something unpleasant for years, then snap.  This is especially true for people who are relatively non-conformist.  And as I've repeatedly said, conformity to social norms is one of the main things employers are looking for.
Therefore, sheepskin effects are not consistent with the signaling model.
I'm surprised by how unempirical Noah is here.  Check out his cv.  He has a B.S. from Stanford and a Ph.D. from the University of Michigan.  If he refused to comply with even one of Stanford's graduation requirements, U Mich never would have accepted him.  If he refused to show up for his dissertation defense, U Mich never would have given him his Ph.D.  His advisor, Miles Kimball, would undoubtedly have begged him to reconsider.  But if Noah stubbornly stuck to his guns, the labor market would have severely punished him.  Signaling explains all this.  Nothing else does.

Why sheepskin effects are consistent with the human capital model

How could the last semester of college be so much more important for the building of human capital than the other 7 semesters combined? It cannot. So how can sheepskin effects be consistent with the human capital model of education? Here's how.

Education, in empirical research jargon, is a "treatment." In the human capital model of college, that treatment has different effects on different people - some study diligently and expand their perspectives greatly and build their networks and learn with an open mind, while others party and slack off and waste time on Twitter and fail to learn. 

Employers try to tell whether the treatment worked.
A strange motive to impute.  Sure, employers want to know if you have the Right Stuff.  But why should they care whether you acquired it via "treatment," or just had it all along?

Dropping out of school is one such clue. It could mean that you didn't build human networks valuable enough to keep you hanging around. It could mean that you have some emotional problem, and that college therefore didn't give you the emotional maturity that it tends to give most people. In other words, even if the treatment typically works, dropping out - including dropping out right before the finish line - could indicate that the treatment didn't work for you.
Key question: If Noah's subpar student make a last-ditch Herculean effort to finish, would he have a good chance of successfully fooling employers about his merits?  If not, why not?  If so, Noah doesn't really disagree with me. 

Sloppy use of the word "signaling"

"But wait, Noah," you may ask. "Aren't 'clue' and 'sign' just synonyms for 'signal'? Didn't you just describe signaling?"
Yes, this is exactly my view.
The confusion here is due to sloppy use of the word "signaling." Are we talking about the Spence signaling model, or are we using "signal" to mean "any piece of information"? I believe that if you want to use the fame and the imprimatur of the Spence signaling model to support your view of college, you should stick to that model.
There's no confusion on my part.  Yes, you can equate "signaling" with a literal interpretation of Spence's model.  But it's far more enlightening to treat the Spence model as a mathematical parable - then see how much of the real world the parable illuminates.  Anything that raises the conditional probability of X signals X.  If the world happens to reward X, this spurs people who lack X to send misleading signals of X in order to receive those rewards.  These are the Spencean insights that matter - not the details of any specific model. 


Sheepskin effects and the consumption/sorting model of college

I do not believe that 100% of the college wage premium reflects the return to college - I believe some fraction of it represents ability sorting. Nor do I believe that 100% of the price students pay to go to college represents investment - I believe some fraction of it represents consumption. College is fun. I believe that college does build some human capital, but part of the institution represents super-smart kids paying to party with each other at Harvard while pretty-smart kids pay to party with each other at Ohio State.
Noah overstates.  Sure, college students have fun.  But so do yuppies.  When I searched the research literature, I found little evidence that college students are having more fun than yuppies.  And if college is really so delightful, why are students so eager to move off-campus? 

The main advantage of college partying over yuppie partying is that parents are far more willing to subsidize the former.  Indeed, imagine parents just handed their 18-year-olds four years worth of tuition.  How many would use the money to have great fun off-campus?  Plenty.  Nerds like Noah and myself may find paradise on a college campus, but for most students college is merely the funnest activity their parents will fund.

COMMENTS (12 to date)
Malcolm writes:

Bryan, I am sure it is something you already have highlighted in your new book, but I thought it might be worth exploring in case you hadn't: "Essay Mills", or where students pay for the academic work they are being credited for.

Mike Hammock writes:

Bryan, I can't help but think you're leaving out an argument in your favor. The last couple semesters of college are more difficult for exactly the sort of student that finds the college signal too costly to send. Classes in the last year of college tend to be upper-level courses, which rely more on papers, research, and self-directed study, and less on hand-holding gen ed courses with lots of practice, homeworks, and multiple choice tests. In their last year, students have to do a better job organizing their time, keeping themselves on task, while also beginning their planning for life after college. Students are often expected to pursue an internship or other real-world experience.

I've seen this many times: Students who can sit in a class of 500 students, do okay on multiple choice tests, do the homework, and just get by can't handle courses that require more self-directed effort.

The last year of college is different, and some students can't handle it. Some of those students leave, showing that they can't send the costly signal, revealing their type. Others spend another year trying to finish up or re-take those last few courses.

Mike Hammock writes:

Sorry, I meant to type

...and self-directed study, and less on hand-holding than gen ed courses...

Mbjoerkh writes:

By moving off-campus do you mean to live off-campus during college or to move away from the college area after completing college? If it's the former I don't understand how that supports Caplan's case on this point..?

rtd writes:

[Comment removed. Please consult our comment policies and check your email for explanation.--Econlib Ed.]

Denver writes:

I received my undergraduate degree in 2014, and my own personal anecdote strongly coincides with Bryan's argument over the last semester of college. I knew several very smart people (A average in highschool) who just couldn't trudge through that last year of college, and dropped out.

I don't think there's one easy answer for why this happens. I think part of it is that the social networks you have at the beginning of school aren't necessarily the same networks you have at the end (your classes tend to become more focused towards your own major, maybe some of your friends graduate early/you graduate late, etc). Which means conscientiousness becomes more important towards the end of school as you might not have as many close friends to support you.

Parents are also less willing to subsidize tuition after four years. So if you know you're not going to finish in that last semester, you might not be willing to pay for further semesters, especially if you know that you might decide to be lazy and flunk (whereas flunking on your parent's dime is much less costly).

There's also just the simple fact that college, even a single semester, is just plain hard. Asking why someone quits after 7 semesters is like asking why a silver medalist in the Olympics would retire.

AMW writes:

I have a cousin who left college with (if memory serves) only a single course worth of credits standing between him and a BA. He seems to have found a job before completely finishing and simply decided it would be too much hassle to go back and complete the degree. I would say this signals a certain lack of conscientiousness, which an employer should take note of.

Maximum Liberty writes:

In addition to @Mike Hammock's wisdom:

  • Many undergraduate degrees now require capstone courses or thesis courses. Most students put these off to the last semester.

  • Degree requirements are sufficiently complex that someone who switched degree plans more than once may realize (six or seven semesters in) that there is no way to finish in eight -- and that they are not interested enough to go to nine or ten.

  • Really hard degrees, like engineering, are often five-year degrees for most people anyway. I'd assume that really hard degrees have a higher attrition rate, especially when the going gets really tough.

Joe W writes:

It seems like Noah is ignoring the "signal" part of "costly signalling". For employers to sort through candidates who passed some college, in order to work out which of them basically passed and which were nowhere near, is arduous and time consuming. By contrast, "is diploma present? Y/N" is dead easy, which is what makes diplomas useful as a signal.

In other words, the costly endeavour isn't passing the last semester, it's passing all semesters. But that last semester is the difference between generating a clear signal and generating indeciperable noise.

(Also, a signal doesn't need to be costly for everyone, it just needs to be costly to fake. Ideally, a signal would be impossible for someone who doesn't have the characteristic in question to send, and effortless for someone who does.)

David Condon writes:

"But it's far more enlightening to treat the Spence model as a mathematical parable - then see how much of the real world the parable illuminates. Anything that raises the conditional probability of X signals X."

This is the way the term signal has been used in behavioral psychology although it's more common to use terms like S+ or cue. There's nothing wrong with describing it in this manner; in fact it makes it easier to be more specific since you're describing a single event rather than a process.

Jay writes:

I put a lot of time into helping a certain person get through her last semester. She passed, barely, but she had real problems stemming from the fact that her foundations were weak. The last year of coursework usually assumes that the student's command of the early material is very solid; if that's not the case then the last year is extremely difficult.

Jardinero1 writes:

Another way of looking at the sheepskin effect is by examining the cases of those who haven't earned the credential but pretend that they do. How successful are they? Sometimes very successful. The below article is about a childhood acquaintance of mine who claimed he had a PhD, but did not, and he was very successful at University College Dublin for a while at least.

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