Economists have long emphasized the link between the market returns to education and investments in schooling. While many studies estimate these returns with earnings data, it is the returns perceived by individuals that affect schooling decisions, and these perceptions may be inaccurate, due to limited or imperfect information. Using data from the Dominican Republic, we find that while the measured returns to schooling are high, the returns perceived by students are extremely low. Students provided with information on the higher measured returns reported increased perceived returns several months later. The least-poor of these students were also significantly less likely to drop out of school in subsequent years. However, there was little or no effect on schooling for the poorest students. Finally, we find some support for the hypothesis that students underestimate the returns to education in part because they rely heavily on information on the returns within their own community, which are downwards biased due to residential segregation by income.
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