Equity and Incentives in Human Capital Investment: Evidence from a Randomized Experiment

Last registered on December 02, 2021

Pre-Trial

Trial Information

General Information

Title
Equity and Incentives in Human Capital Investment: Evidence from a Randomized Experiment
RCT ID
AEARCTR-0003290
Initial registration date
December 09, 2020
Last updated
December 02, 2021, 12:27 PM EST

Locations

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Primary Investigator

Affiliation
University of Arizona

Other Primary Investigator(s)

PI Affiliation
University of Calgary
PI Affiliation
University of Chicago

Additional Trial Information

Status
In development
Start date
2020-10-01
End date
2022-06-15
Secondary IDs
Prior work
This trial does not extend or rely on any prior RCTs.
Abstract
Income share agreements (ISAs), which cover college attendance costs in exchange for claims on future income, may attract students with poor earnings potential (adverse selection) or distort labor supply among enrollees (moral hazard). In this study, we conduct a field experiment to separately test for moral hazard and adverse selection by varying the contract terms offered by a large ISA provider in South America. Specifically, we randomly offer existing ISA enrollees the opportunity to lower their pledged income shares by 5 or 10 percentage points in exchange for flat monthly fees ranging from 1,000 to 70,000 pesos. To identify moral hazard, we estimate the treatment effect of accepting a contract with a lower income-share obligation, using contract offers as instruments. To identify adverse selection, we compare individuals who received different menus of offers but ultimately pledged the same income share. Estimating treatment effects and selection patterns in earnings, repayment, and risk factors enables us to quantify the welfare losses associated with information asymmetries in equity-like contracts and helps inform the debate over how to fairly and efficiently finance human capital investments.
External Link(s)

Registration Citation

Citation
Herbst, Daniel, Miguel Palacios and Constantine Yannelis. 2021. "Equity and Incentives in Human Capital Investment: Evidence from a Randomized Experiment." AEA RCT Registry. December 02. https://doi.org/10.1257/rct.3290-1.1
Sponsors & Partners

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Experimental Details

Interventions

Intervention(s)
We randomly offer existing ISA enrollees the opportunity to lower their pledged income shares by 5 or 10 percentage points in exchange for flat monthly fees ranging from 1,000 to 7000 pesos. To identify moral hazard, we estimate the treatment effect of accepting a contract with a lower income-share obligation, using contract offers as instruments. To identify adverse selection, we compare individuals who received different menus of offers but ultimately pledged the same income share.
Intervention Start Date
2020-12-09
Intervention End Date
2021-07-15

Primary Outcomes

Primary Outcomes (end points)
Repayment amount and frequency; income and employment; elicited risk preferences and earnings expectations
Primary Outcomes (explanation)
Risk/time preferences and earning expectations will be gathered using a survey with questions modeled after the Survey of Consumer Finances (SCF).

Secondary Outcomes

Secondary Outcomes (end points)
GPA and graduation rates; college institution, program, and major choice; industry and occupation;
Secondary Outcomes (explanation)
Note that, because we're interested in estimating adverse selection, some "outcomes" describe borrowers before the intervention. These "outcomes" would not be used to estimate treatment (moral hazard) effects.

Experimental Design

Experimental Design
Our experiment involves randomly extending revised contract offerings to graduates enrolled in Lumni ISAs. These contract offerings will take the form of “discounts” to income-share obligations in exchange for an additional up-front payment. For example, consider an ISA enrollee three years after graduation who is obligated to pay 15 percent of her annual income to Lumni over the next two years. One experimental treatment would offer that student a revised contract reducing her income-share obligation to 10 percent in exchange for an additional 70,000 pesos per month. Another treatment offers the same five-percentage-point reduction for 1,000 pesos, and another treatment group offers a ten-percentage-point reduction for 70,000 pesos.
Experimental Design Details
Not available
Randomization Method
randomization done in office by a computer
Randomization Unit
Individual
Was the treatment clustered?
No

Experiment Characteristics

Sample size: planned number of clusters
126 ISA enrollees
Sample size: planned number of observations
126 ISA enrollees
Sample size (or number of clusters) by treatment arms
Control: No revised contract offered, N = 46
Treatment 1: ISA reduction=10%, Flat Monthly Payment=70,000 pesos, N = 40
Treatment 2: ISA reduction=5%, Flat Monthly Payment=70,000 pesos, N = 30
Treatment 3: ISA reduction=5%, Flat Monthly Payment=1,000 pesos, N = 10
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB

Institutional Review Boards (IRBs)

IRB Name
University of Chicago Institutional Review Board
IRB Approval Date
2019-03-20
IRB Approval Number
IRB18-1796