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A Parametric Control Function Approach to Estimating the Returns to Schooling in the Absence of Exclusion Restrictions: An Application to the NLSY

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Author Info

  • Farré, Lídia

    ()
    (IAE Barcelona (CSIC))

  • Klein, Roger

    ()
    (Rutgers University)

  • Vella, Francis

    ()
    (Georgetown University)

Abstract

An innovation which bypasses the need for instruments when estimating endogenous treatment effects is identification via conditional second moments. The most general of these approaches is Klein and Vella (2010) which models the conditional variances semiparametrically. While this is attractive, as identification is not reliant on parametric assumptions for variances, the non-parametric aspect of the estimation may discourage practitioners from its use. This paper outlines how the estimator can be implemented parametrically. The use of parametric assumptions is accompanied by a large reduction in computational and programming demands. We illustrate the approach by estimating the return to education using a sample drawn from the National Longitudinal Survey of Youth 1979. Accounting for endogeneity increases the estimate of the return to education from 6.8% to 11.2%.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4935.

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Length: 44 pages
Date of creation: May 2010
Date of revision:
Publication status: published in: Empirical Economics, 2013, 44 (1), 111-133
Handle: RePEc:iza:izadps:dp4935

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Keywords: return to education; heteroskedasticity; endogeneity;

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  1. Henry S. Farber & Jeffrey R. Kling & Alan Krueger, 1999. "Interpreting Instrumental Variables Estimates of the Returns to Schooling," Working Papers 794, Princeton University, Department of Economics, Industrial Relations Section..
  2. Stephen V. Cameron & James J. Heckman, 2001. "The Dynamics of Educational Attainment for Black, Hispanic, and White Males," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 455-499, June.
  3. Angrist, Joshua D & Krueger, Alan B, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 979-1014, November.
  4. Card, David, 1999. "The causal effect of education on earnings," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 30, pages 1801-1863 Elsevier.
  5. Lance Lochner & Enrico Moretti, 2004. "The Effect of Education on Crime: Evidence from Prison Inmates, Arrests, and Self-Reports," American Economic Review, American Economic Association, vol. 94(1), pages 155-189, March.
  6. Rubb, S., 2003. "Overeducation in the labor market: a comment and re-analysis of a meta-analysis," Economics of Education Review, Elsevier, vol. 22(6), pages 621-629, December.
  7. Klein, Roger & Vella, Francis, 2010. "Estimating a class of triangular simultaneous equations models without exclusion restrictions," Journal of Econometrics, Elsevier, vol. 154(2), pages 154-164, February.
  8. Kane, Thomas J & Rouse, Cecilia Elena, 1995. "Labor-Market Returns to Two- and Four-Year College," American Economic Review, American Economic Association, vol. 85(3), pages 600-614, June.
  9. James J. Heckman & Sergio Urzua & Edward Vytlacil, 2009. "Understanding Instrumental Variables in Models with Essential Heterogeneity," Working Papers 200941, Geary Institute, University College Dublin.
  10. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  11. James Heckman & Pedro Carneiro & Flavio Cunha, 2004. "The Technology of Skill Formation," 2004 Meeting Papers 681, Society for Economic Dynamics.
  12. Harmon, Colm & Walker, Ian, 1995. "Estimates of the Economic Return to Schooling for the United Kingdom," American Economic Review, American Economic Association, vol. 85(5), pages 1278-86, December.
  13. Vincent Hogan & Roberto Rigobon, 2003. "Using Heteroscedasticity to Estimate the Returns to Education," Working Papers 200301, School Of Economics, University College Dublin.
  14. Whitney K. Newey & James L. Powell & Francis Vella, 1998. "Nonparametric Estimation of Triangular Simultaneous Equations Models," Working papers 98-6, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. McKinley L. Blackburn & David Neumark, 1993. "Are OLS Estimates of the Return to Schooling Biased Downward? Another Look," NBER Working Papers 4259, National Bureau of Economic Research, Inc.
  16. Vella, Francis & Gregory, R. G., 1996. "Selection bias and human capital investment: Estimating the rates of return to education for young males," Labour Economics, Elsevier, vol. 3(2), pages 197-219, September.
  17. Dolton, Peter & Vignoles, Anna, 2000. "The incidence and effects of overeducation in the U.K. graduate labour market," Economics of Education Review, Elsevier, vol. 19(2), pages 179-198, April.
  18. Wooldridge, Jeffrey M., 2003. "Further results on instrumental variables estimation of average treatment effects in the correlated random coefficient model," Economics Letters, Elsevier, vol. 79(2), pages 185-191, May.
  19. Esther Duflo, 2001. "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment," American Economic Review, American Economic Association, vol. 91(4), pages 795-813, September.
  20. Klein, Roger & Vella, Francis, 2006. "Estimating the Return to Endogenous Schooling Decisions for Australian Workers via Conditional Second Moments," IZA Discussion Papers 2407, Institute for the Study of Labor (IZA).
  21. Stacey H. Chen, 2008. "Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 275-289, May.
  22. Roger Klein & Francis Vella, 2009. "Estimating the Return to Endogenous Schooling Decisions via Conditional Second Moments," Journal of Human Resources, University of Wisconsin Press, vol. 44(4).
  23. Lang, Kevin, 1993. "Ability Bias, Discount Rate Bias and the Return to Education," MPRA Paper 24651, University Library of Munich, Germany.
  24. Groot, Wim & Maassen van den Brink, Henriette, 2000. "Overeducation in the labor market: a meta-analysis," Economics of Education Review, Elsevier, vol. 19(2), pages 149-158, April.
  25. Rummery, Sarah & Vella, Francis & Verbeek, Marno, 1999. "Estimating the returns to education for Australian youth via rank-order instrumental variables," Labour Economics, Elsevier, vol. 6(4), pages 491-507, November.
  26. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-60, September.
  27. Stephen V. Cameron & Christopher Taber, 2004. "Estimation of Educational Borrowing Constraints Using Returns to Schooling," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 132-182, February.
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Cited by:
  1. Claudia Berg & Shahe Emran & Forhad Shilpi, 2014. "Microfinance and Moneylenders: Long-run Effects of MFIs on Informal Credit Market in Bangladesh," Working Papers 25, Institute of Microfinance (InM).
  2. Daniel L. Millimet & Jayjit Roy, 2011. "Three New Empirical Tests of the Pollution Haven Hypothesis When Environmental Regulation is Endogenous," Working Papers 11-10, Department of Economics, Appalachian State University.

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