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Biases of the Ordinary Least Squares and Instrumental Variables Estimators of the Intergenerational Earnings Correlation : Revisited in the Light of Panel Data

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Author Info
Ramses H. ABUL NAGA

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Abstract

The OLS estimator of the intergenerational earnings correlation is biased towards zero, while the instrumental variables estimator is biased upwards. The first of these results arises because of measurement error, while the latter rests on the presumption that the education of the parent family is an invalid instrument. We propose a panel data framework for quantifying the asymptotic biases of these estimators as well as a mis-specification test for the IV estimator. Using US data we estimate the bias of the OLS estimator to be in the order of 10% to 20%, and that of IV to vary between 40% and 60%. Supporting evidence that the IV estimator is inconsistent, in face of the specification test, is however limited, and results are shown to be sensitive to the assumptions underlying the serial correlation in transitory incomes.

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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 01.05.

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Length: 15 pages
Date of creation: Apr 2001
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Handle: RePEc:lau:crdeep:01.05

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
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Related research
Keywords: intergenerational mobility; measurement error; panel data; biased estimation;

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Find related papers by JEL classification:
I3 - Health, Education, and Welfare - - Welfare and Poverty
J62 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Job, Occupational and Intergenerational Mobility; Promotion

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References listed on IDEAS
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.:
  1. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January. [Downloadable!] (restricted)
  2. Ramses H. Abul Naga, 1999. "Estimating the Intergenerational Correlation of Incomes: An Errors in Variables Framework," STICERD - Distributional Analysis Research Programme Papers 44, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
    Other versions:
  3. Ramses H. ABUL NAGA, 2000. "Galtonian Regression of Intergenerational Income Linkages : Biased Procedures, a New Estimator and Mean-Square Error Comparisons," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 00.13, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
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  4. Zimmerman, David J, 1992. "Regression toward Mediocrity in Economic Stature," American Economic Review, American Economic Association, vol. 82(3), pages 409-29, June.
  5. Solon, Gary, 1992. "Intergenerational Income Mobility in the United States," American Economic Review, American Economic Association, vol. 82(3), pages 393-408, June. [Downloadable!] (restricted)
  6. Bjorklund, Anders & Jantti, Markus, 1997. "Intergenerational Income Mobility in Sweden Compared to the United States," American Economic Review, American Economic Association, vol. 87(5), pages 1009-18, December. [Downloadable!] (restricted)
  7. Ramses ABUL NAGA & Jaya KRISHNAKUMAR, 1999. "Panel Data Estimation of the Intergenerational Correlation of Incomes," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9910, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
  8. Solon, Gary, 1999. "Intergenerational mobility in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 29, pages 1761-1800 Elsevier. [Downloadable!] (restricted)
  9. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February. [Downloadable!] (restricted)
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  10. Behrman, Jere R & Taubman, Paul, 1990. "The Intergenerational Correlation between Children's Adult Earnings and Their Parents' Income: Result from the Michigan Panel Survey of Income Dynamics," Review of Income and Wealth, Blackwell Publishing, vol. 36(2), pages 115-27, June.
  11. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March. [Downloadable!] (restricted)
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  12. Bowles, Samuel, 1972. "Schooling and Inequality from Generation to Generation," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages S219-S51, Part II, . [Downloadable!] (restricted)
  13. Dearden, Lorraine & Machin, Stephen & Reed, Howard, 1997. "Intergenerational Mobility in Britain," Economic Journal, Royal Economic Society, vol. 107(440), pages 47-66, January. [Downloadable!] (restricted)
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  14. Meijer, Erik & Wansbeek, Tom, 2000. "Measurement error in a single regressor," Economics Letters, Elsevier, vol. 69(3), pages 277-284, December. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Ramses H. Abul Naga & Frank A Cowell, 2002. "Intergenerational Mobility in Britain: Revisiting the Prediction Approach of Dearden, Machin and Reed," STICERD - Distributional Analysis Research Programme Papers 62, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
    Other versions:
  2. Christopher E. Dunn, 2007. "The Intergenerational Transmission of Lifetime Earnings: Evidence from Brazil," The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, vol. 7(2). [Downloadable!]
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