Accounting for Student Disadvantage in Value-Added Models

We study the relative performance of two policy-relevant value-added models—a one-step fixed effect model and a two-step aggregated residuals model—using a simulated data set well grounded in the value-added literature. A key feature of our data generating process is that student achievement depends on a continuous measure of economic disadvantage. This is a realistic condition that has implications for model performance because researchers typically have access to only a noisy, binary measure of disadvantage. We find that one- and two-step value-added models perform similarly across a wide range of student and teacher sorting conditions, with the two-step model modestly outperforming the one-step model in conditions that best match observed sorting in real data. A reason for the generally superior performance of the two-step model is that it better handles the use of an error-prone, dichotomous proxy for student disadvantage.