RETURNS TO FIELD OF STUDY VERSUS SCHOOL QUALITY: MBA SELECTION ON OBSERVED AND UNOBSERVED HETEROGENEITY

I. INTRODUCTION Given the importance of human capital investment, prospective college students and parents must often choose between higher-quality-and-cost and lower-quality-and-cost schools. The considerable literature that has examined this trade-off identifies not only school quality as a principal driver of postbaccalaureate earnings but also students' choice over fields of study. (1) Despite the attention lavished on school rankings, James et al. (1989), for example, conclude that "... college experience variables (especially major) explain more of the variance (in earnings) than measured family background, ability, and college characteristics combined" (252). (2) That is, a prospective baccalaureate student can expect strong future earnings not only by attending a highly ranked institution but also by majoring in a highly rewarded field, such as engineering, the sciences, or business, at a lesser ranked school. Surprisingly, this important conclusion about the trade-off between content and quality has not been generalized to any other postsecondary degree programs, such as associate degrees at community colleges or master's of education, Master's of Business Administration (MBA), law, medical, or PhD programs. The goal of this article is to fill this void in the literature by estimating the returns to both program quality and fields of specialization in the context of graduate education. Specifically, we estimate these returns for the third most commonly earned postsecondary degree, the MBA (Morgeson and Nahrgang 2008). Prior research has estimated a large drop-off in returns to an MBA beyond the nation's elite programs (Arcidiacono et al. 2008). Because of this, and because MBAs are likely to face significant opportunity costs of moving to attend a more highly ranked program than what may be available locally, estimating the tradeoffs between returns to program quality and to fields of specialization is especially important for MBAs. In the data set used in this study, the average MBA student had about 6 yr of full-time work experience, half were married, and 27% had children. However, if family and job ties restrict potential MBA students from enrolling in more highly ranked programs, might they nonetheless be able to earn high wage premiums by specializing their studies in fields with higher returns? Our study focuses on MBA areas of concentration. In response to competitive pressures and consumer demand, many business schools have offered the opportunity for students to go beyond the core MBA curriculum by tailoring additional coursework toward a particular area. (3) In this way, MBA concentrations mirror the role of undergraduate majors. Unfortunately, to our knowledge, no entity such as the Association of Advance Collegiate Schools or Business (AACSB) or the Graduate Management Admissions Council (GMAC) systematically collects information about the specific courses that constitute areas of concentration by MBA program. The structure and actual courses included in concentrations within MBA programs vary from school to school, akin to differences among undergraduate business programs. (4) However, MBA concentrations typically consist of four to five topical courses, but range as high as seven or more, according to Dierdorff and Rubin's (2008) survey of 576 of the 621 programs in the United States accredited by the AACSB. (5) Perhaps the main distinction between undergraduate and MBA fields of study is that while most U.S. undergraduate business programs offer the full array of standard business fields, that is, general management, finance, accounting, marketing, management information systems (MIS), and international business, MBA areas of concentration, despite their increasing prevalence, are more selectively offered by schools. Furthermore, the presence of areas of concentration does not appear to be correlated with overall school quality, suggesting that the quality of program attended and the choice of focus of study may be two independent drivers of increased earnings among graduates. …