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Abstract

Standard estimates of the rates of return to primary schooling in most developing countries are high, and have been used to support advocacy of increased investments in primary schooling. But the standard estimates ignore repetition and dropout experience. This paper develops a procedure for estimating the impact of repetition and dropout rates and applies it to Indonesian data. The results are striking, suggesting that standard procedures overstate substantially the economic returns to schooling in Indonesia (e.g. by 38 to 78% for primary schooling), distort the pattern of estimated returns across schooling levels by overestimating especially the returns to the lower schooling levels, and misrepresent the relative returns to schooling investments among groups identified by sex, region, rural-urban residence, and age.

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