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Abstract
I estimate a dynamic model of educational decisions when researchers do not have access to measures of study effort. Students choose the academic level of their program and the probability to perform well. This differs from a pure discrete choice model that assumes performance follows an exogenous law of motion. I investigate high school tracking policies and obtain the following results: (1) encouraging underperforming students to switch to less academic programs reduces grade retention and dropout, (2) the decrease in the number of college graduates is small, and (3) a pure discrete choice model would ignore changes in unobserved study effort and find a large decrease in the number of college graduates.
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