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Estimating distributions of potential outcomes using local instrumental variables with an application to changes in college enrollment and wage inequality

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  • Pedro Carneiro

    ()
    (Institute for Fiscal Studies and University College London)

  • Sokbae 'Simon' Lee

    ()
    (Institute for Fiscal Studies and University College London)

Abstract

This paper extends the method of local instrumental variables developed by Heckman and Vytlacil (1999, 2001, 2005) to the estimation of not only means, but also distributions of potential outcomes. The newly developed method is illustrated by applying it to changes in college enrollment and wage inequality using data from the National Longitudinal Survey of Youth of 1979. Increases in college enrollment cause changes in the distribution of ability among college and high school graduates. This paper estimates a semiparametric selection model of schooling and wages to show that, for fixed skill prices, a 14% increase in college participation (analogous to the increase observed in the 1980s), reduces the college premium by 12% and increases the 90-10 percentile ratio among college graduates by 2%.

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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP01/09.

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Date of creation: Jan 2009
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Handle: RePEc:ifs:cemmap:01/09

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