Are Education and Entrepreneurial Income Endogenous and do Family Background Variables make Sense as Instruments? A Bayesian Analysis
AbstractEducation is a well-known driver of (entrepreneurial) income. The measurement of its influence, however, suffers from endogeneity suspicion. For instance, ability and occupational choice are mentioned as driving both the level of (entrepreneurial) income and of education. Using instrumental variables can provide a way out. However, three questions remain: whether endogeneity is really present, whether it matters and whether the selected instruments make sense. Using Bayesian methods, we find that the relationship between education and entrepreneurial income is indeed endogenous and that the impact of endogeneity on the estimated relationship between educa-tion and income is sizeable. We do so using family background variables and show that relaxing the strict validity assumption of these instruments does not lead to strongly different results. This is an important finding because family background variables are generally strongly correlated with education and are available in most datasets. Our approach is applicable beyond the field of returns to education for income. It applies wherever endogeneity suspicion arises and the three questions become relevant.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-024/4.
Date of creation: 26 Feb 2010
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Education; income; entrepreneurship; self-employment; endogeneity; instrumental variables; Bayesian analysis; family background variables;
Other versions of this item:
- Jörn H. Block & Lennart F. Hoogerheide & A. Roy Thurik, 2010. "Are Education and Entrepreneurial Income Endogenous and Do Family Background Variables Make Sense as Instruments?: A Bayesian Analysis," SOEPpapers on Multidisciplinary Panel Data Research 329, DIW Berlin, The German Socio-Economic Panel (SOEP).
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
- M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-EDU-2011-02-26 (Education)
- NEP-ENT-2011-02-26 (Entrepreneurship)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- C. Mirjam van Praag, 2003. "Business Survival and Success of Young Small Business Owners," Tinbergen Institute Discussion Papers 03-050/3, Tinbergen Institute.
- van Praag, Mirjam & van Witteloostuijn, Arjen & van der Sluis, Justin, 2009. "Returns for Entrepreneurs vs. Employees: The Effect of Education and Personal Control on the Relative Performance of Entrepreneurs vs. Wage Employees," IZA Discussion Papers 4628, Institute for the Study of Labor (IZA).
- Justin van der Sluis & Mirjam van Praag & Wim Vijverberg, 2003. "Entrepreneurship Selection and Performance," Tinbergen Institute Discussion Papers 03-046/3, Tinbergen Institute, revised 24 Sep 2004.
- Justin van der Sluis & Mirjam van Praag & Wim Vijverberg, 2008. "Education And Entrepreneurship Selection And Performance: A Review Of The Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 22(5), pages 795-841, December.
- Fossen, Frank M. & Büttner, Tobias J. M., 2012.
"The returns to education for opportunity entrepreneurs, necessity entrepreneurs, and paid employees,"
2012/19, Free University Berlin, School of Business & Economics.
- Fossen, Frank M. & Büttner, Tobias J.M., 2013. "The returns to education for opportunity entrepreneurs, necessity entrepreneurs, and paid employees," Economics of Education Review, Elsevier, vol. 37(C), pages 66-84.
- Fossen, Frank M. & Büttner, Tobias J. M., 2012. "The Returns to Education for Opportunity Entrepreneurs, Necessity Entrepreneurs, and Paid Employees," IZA Discussion Papers 6819, Institute for the Study of Labor (IZA).
- Frank M. Fossen & Tobias J. M. Büttner, 2012. "The Returns to Education for Opportunity Entrepreneurs, Necessity Entrepreneurs, and Paid Employees," SOEPpapers on Multidisciplinary Panel Data Research 482, DIW Berlin, The German Socio-Economic Panel (SOEP).
- Frank M. Fossen & Tobias J. M. Büttner, 2012. "The Returns to Education for Opportunity Entrepreneurs, Necessity Entrepreneurs, and Paid Employees," Discussion Papers of DIW Berlin 1241, DIW Berlin, German Institute for Economic Research.
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