What Factors Drive Individual Misperceptions of the Returns to Schooling in Tanzania? Some Lessons for Education Policy

TL;DR

This study estimates actual and perceived returns to schooling in Tanzania, revealing significant underestimation by individuals and identifying key factors influencing these misperceptions to inform policy interventions.

Contribution

It provides empirical estimates of actual returns to schooling in Tanzania and analyzes the determinants of individual misperceptions, a topic with limited prior data.

Findings

Actual returns to schooling increase earnings by 9-11% per year.

Individuals underestimate returns by 74-79%.

Income, assets, and education level influence misperceptions.

Abstract

Evidence on educational returns and the factors that determine the demand for schooling in developing countries is extremely scarce. Building on previous studies that show individuals underestimating the returns to schooling, we use two surveys from Tanzania to estimate both the actual and perceived schooling returns and subsequently examine what factors drive individual misperceptions regarding actual returns. Using ordinary least squares and instrumental variable methods, we find that each additional year of schooling in Tanzania increases earnings, on average, by 9 to 11 percent. We find that on average individuals underestimate returns to schooling by 74 to 79 percent and three factors are associated with these misperceptions: income, asset poverty and educational attainment. Shedding light on what factors relate to individual beliefs about educational returns can inform policy on how to structure effective interventions in order to correct individual misperceptions.