A New Test of Compensating Differences: Evidence on the Importance of Unobserved Heterogeneity
Previous evidence on the validity of the compensating differences theory has been ambiguous. This is mainly attributed to that, in most contexts, important components of worker skills are unobserved, leading to biased estimates of compensating differences. This article uses data on professional basketball players, which contain rich measures of worker ability, measures of employer nonpecuniary characteristics, and location amenities, to produce a new test of the theory. Empirical results strongly support the theory's predictions in this context. Using this data, we also find that when important measures of player skills are omitted from the specification, there is only limited evidence in support of compensating differences. Our findings indicate that in the presence of unobserved heterogeneity, the quality of the empirical results is distorted and inference on the validity of the theory is misleading.
Volume (Year): 11 (2010)
Issue (Month): 5 (October)
|Contact details of provider:|
When requesting a correction, please mention this item's handle: RePEc:sae:jospec:v:11:y:2010:i:5:p:475-495. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (SAGE Publications)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.