This project is estimating dynamic models of how individuals make educational and occupational choices over the life cycle. It is necessary to model career choices in a dynamic context, because current schooling/employment decisions result not only in current period rewards, but also lead to human capital accumulation that alters future wages. In such a situation, it is reasonable to model individuals as if they solve a discrete stochastic dynamic programming (DS-DP) problem in order to make optimal current period decisions (that is, to model agents' behavior as if they forecase how their current decisions will affect their future payoffs).
Unfortunately, although most economists would agree that a DS-DP problem is the proper way to model choice behavior in such dynamic environments, implementation of such models has been severely limited by the computational burdens involved. Estimation of DS-DP models requires solving for the value functions at each point in the state space of the problem. These value functions are multiple integrals over the stochastic processes that drive decisions. As the number of choices grows, the number of state space points grows rapidly, making it infeasible to evaluate all the necessary multiple integrals using numerical methods like quadrature.
New methods are being used to estimate dynamic models of educational and occupational choices over the life cycle. An estimated dynamic model of career choices can aid in the design of public policies such as tuition subsidies, unemployment insurance, and retraining programs for displaced workers. The occupational choice model contains various occupations with different educational requirements as options. Recently, some economists have proposed the introduction of wage subsidies. This model finds that they would actually reduce school attendance of young men because the subsidies raise wages primarily in occupations that require little education, making such occupations more attractive.
Kenneth I. Wolpin, Economics Department, University of Pennsylvania, Philadelphia, Pennsylvania
New work is being started on a new model of educational and occupational choices of young women. This is a major extension of the basic model used for young men because it brings in fertility and marriage as additional decisions. It is impossible to sensibly model the career decisions of young women without bringing in these additional factors. Once completed, it will be possible to use this model to address a number of important questions about how public welfare policies aimed at women and children (such as the AFDC program) affect behavior. For example, this model will simulate how changes in these policies might affect teenage pregnancy rates, out-of-wedlock birth rates, and high school dropout rates.
An important overall goal of this research is to provide evidence on the practical usefulness of the simulation approach for estimation of DS-DP models. If the approach proves useful, it could lead to increased interest on the part of economists in the use of supercomputers to estimate dynamic discrete choice models.
A fundamental question in political economy is why people decide to run for office. This project is providing at least a partial answer and quantifying the returns to a career in the United States Congress. To achieve this goal, a dynamic model of career decisions of a member of the United States Congress is being specified and this model is being estimated using a newly collected dataset.
The study of Congressional careers has a long tradition in American politics. However, existing studies of Congressional careers suffer from two main limitations. First, they estimate static models in which politicians' decisions about whether to run for office depend only on current and not future rewards. Second, they ignore the possibility that representatives may decide to leave Congress to pursue alternative professional careers. This research overcomes both these limitations and provides a new framework for empirical analysis.
In this model, a politician first decides whether or not to run for the House of Representatives. If the person is elected, they must eventually decide whether to 1) run for re-election, 2) run for election to higher office, 3) exit politics for a private sector job, or 4) retire from politics. If the politician decides to run for re-election or for higher office, then they face probabilities of winning in the elections. In order to choose among these options, the politician will compare the expected payoffs associated with the different alternatives. If re-elected, the politician faces another set of choices in the next period.
The problem that politicians face is dynamic in the sense that the payoffs from each of the choice options is not reflected only in current period rewards, but also in future rewards. Specifically, the payoff to winning a seat in Congress is not only the wage and prestige that a person receives from being in Congress for one term. It also includes the increment in expected future payoffs that accrue as a result of election. In such a situation, it is reasonable to model individuals as if they solve a discrete stochastic dynamic programming (DS-DP) problem in order to make optimal current period decisions (that is, to model agents' behavior as if they forecast how their current decisions will affect their future payoffs). Unfortunately, although most economists would agree that a DS-DP problem is the proper way to model choice behavior in such dunamic environments, implementation of such models has been severely limited by the computational burdens involved.
A key figure in this model is the explicit modeling of the potential career opportunities of politicians outside Congress. When a politician exits from Congress, it is assumed that they can choose among a set of occupations, and the wage the politician would receive in each of these options is a function of the politician's age, education, and congressional experience. Thus, the framework will enable a sorting of the relative importance of two key factors that may induce people to pursue a political career-the utility politicians derive from being in Congress and the salaries they receive while in Congress vs. the private sector returns to Congressional experience.
Finally, the estimated model can be used to evaluate the effects of various interesting policy experiments on the value of a Congressional seat and on the career decisions of politicians. Such policies include the introduction of term limits, changes in the pension regime, changes in the wages in Congress, and changes in the seniority rule for committee appointments to name a few.
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