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Ability Bias, Discount Rate Bias and the Return to Education

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  • Lang, Kevin

Abstract

I reconsider various methods for correcting for bias in estimates of the returns to schooling. I argue that the literature on ability bias has ignored complications implicit in theoretical formulations of the choice of human capital. In particular, such models imply that adding ability to the wage equation may not be informative about the importance of bias and that variables correlated with the discount rate will generally not be suitable instruments for education. Indeed discount rate variation may generate downward bias. Estimation of a structural wage/schooling model suggests that OLS estimates of the return to schooling are biased downwards.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24651.

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Date of creation: 12 Mar 1993
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Handle: RePEc:pra:mprapa:24651

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Keywords: instrumental variables; returns to schooling; discount rates; ability bias;

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References

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  1. Angrist, Joshua D & Krueger, Alan B, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(4), pages 979-1014, November.
  2. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  3. repec:fth:prinin:290 is not listed on IDEAS
  4. J. A. Hausman & W. E. Taylor, 1980. "Panel Data and Unobservable Individual Effects," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 255, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Joshua Angrist & Alan Krueger, 1991. "Estimating the Payoff to Schooling Using the Vietnam-era Draft Lottery," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 670, Princeton University, Department of Economics, Industrial Relations Section..
  6. Boissiere, M & Knight, J B & Sabot, R H, 1985. "Earnings, Schooling, Ability, and Cognitive Skills," American Economic Review, American Economic Association, American Economic Association, vol. 75(5), pages 1016-30, December.
  7. Robert J. Willis & Sherwin Rosen, 1978. "Education and Self-Selection," NBER Working Papers 0249, National Bureau of Economic Research, Inc.
  8. Lang, Kevin & Ruud, Paul A, 1986. "Returns to Schooling, Implicit Discount Rates and Black-White Wage Differentials," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 41-47, February.
  9. Griliches, Zvi & Mason, William M, 1972. "Education, Income, and Ability," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 80(3), pages S74-S103, Part II, .
  10. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, Econometric Society, vol. 45(1), pages 1-22, January.
  11. Hause, John C, 1972. "Earnings Profile: Ability and Schooling," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 80(3), pages S108-S38, Part II, .
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