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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

  • Lídia Farré

    ()

  • Roger Klein

    ()

  • Francis Vella

    ()

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 (J Econom 154:154–164, 2010), which models the conditional variances semiparametrically. While this is attractive, as identification is not reliant on parametric assumptions for variances, the nonparametric 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%. Copyright Springer-Verlag 2013

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File URL: http://hdl.handle.net/10.1007/s00181-010-0376-5
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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 44 (2013)
Issue (Month): 1 (February)
Pages: 111-133

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Handle: RePEc:spr:empeco:v:44:y:2013:i:1:p:111-133
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  1. Kling, Jeffrey R, 2001. "Interpreting Instrumental Variables Estimates of the Returns to Schooling," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(3), pages 358-64, July.
  2. 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.
  3. James J. Heckman & Sergio Urzua & Edward Vytlacil, 2006. "Understanding Instrumental Variables in Models with Essential Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 389-432, August.
  4. 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.
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  7. Esther Duflo, 2000. "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment," NBER Working Papers 7860, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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).
  13. Lang, Kevin, 1993. "Ability Bias, Discount Rate Bias and the Return to Education," MPRA Paper 24651, University Library of Munich, Germany.
  14. 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.
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  16. Colm Harmon & Ian Walker, 1995. "Estimates of the economic return to schooling for the United Kingdom," Open Access publications 10197/647, School of Economics, University College Dublin.
  17. Klein, Roger & Vella, Francis, 2006. "Estimating a Class of Triangular Simultaneous Equations Models Without Exclusion Restrictions," IZA Discussion Papers 2378, Institute for the Study of Labor (IZA).
  18. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  19. 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.
  20. 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.
  21. 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.
  22. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-60, September.
  23. James Heckman & Flavio Cunha, 2007. "The Technology of Skill Formation," American Economic Review, American Economic Association, vol. 97(2), pages 31-47, May.
  24. Vincent (Vincent Peter) Hogan & Roberto Rigobon, 2003. "Using heteroscedasticity to estimate the returns to education," Working Papers 200301, School of Economics, University College Dublin.
  25. 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.
  26. 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.
  27. 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.
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