and which she can mitigate through effort. We estimate the model with unique administrative data on the universe of higher education students in Colombia—a country highly representative of Latin America—and use the parameter estimates to simulate free college programs which differ in eligibility requirements. We study whether free college affects students’ risk and effort, and perform a simple cost-benefit analysis of free college.

Understanding the trade-offs in free college is critical, particularly in developing economies. In Latin America, higher education enrollment rates rose from 23 to 52 percent between 2000 and 2017. Since only 14 percent of the working age population has completed higher education, Mincerian returns are high—104 percent on average relative to a high school diploma (Ferreyra et al 2017). Although such high returns should attract many individuals to higher education, liquidity constraints severely limit access, as countries subsidize public but not private higher education and often lack credit markets. College subsidies are therefore a promising avenue to broader access. While students in several of these countries have recently taken to the streets in demand of full subsidies, the feasibility of free college has been called into question by these countries’ low growth and tight fiscal constraints in recent years—conditions, of course, that have been seriously aggravated by the COVID-19 pandemic.

Even if free college were implemented, the cross-country evidence presented above suggests that it might not raise the stock of skilled human capital. One possible explanation is that free college might attract academically weak students, yet another is that it might discourage student effort. Free college raises consumption during college, therefore enhancing the attractiveness of being a college student (the “college experience”) and potentially unleashing three effects on effort. First is the _loss-of-urgency effect_ , whereby the student wishes to enjoy the enhanced college experience and loses the urgency to graduate. Second is the _substitution effect_ , whereby the enhanced consumption compensates for greater effort. Third is the _risk effect_ , as the effort changes induced by the other two effects affect not only current but also future performance and graduation prospects. If a strong loss of urgency prevails for many students, graduation rates will not rise and may even fall.

Because of its key role in free college’s success, student effort is a fundamental piece in our study. In the model, heterogeneous high school graduates decide whether to enroll in college. Their labor market wage depends on their final educational attainment. To graduate, a student must complete a set number of classes in a given time. Each year she chooses the number of classes she expects to complete (henceforth, her target), which determines the effort she will make. The number of classes completed by the student in a year depends on her ability, effort, and a performance shock which depends on her cumulative performance. At the end of the year she receives another shock, also dependent on cumulative performance, which may force her to drop out. Effort, then, has a direct effect on class completion and an indirect effect mitigating the risk of performing poorly or dropping out.

Our model captures indivisibilities that limit policy impact. To affect class completion, a policy must induce a non-marginal effort change to complete at least one additional class. And, to affect graduation rates, the policy must induce a large enough effort increase to complete all the required classes. These effort changes may be simply too costly for some students.

Estimated with Simulated Method of Moments, our model captures the main features of the data. In Colombia’s high school class of 2005, a staggering 70 percent of students come from low-income families and only 32.3 percent of students enroll in college within five years. Among those who attend college, only 46 percent graduate—mostly late. Student ability plays 3