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On the Validity of Econometric Techniques with Weak Instruments: Inference on Returns to Education Using Compulsory School Attendance Laws

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  • Luiz M. Cruz
  • Marcelo J. Moreira

Abstract

We evaluate Angrist and Krueger (1991) and Bound, Jaeger, and Baker (1995) by constructing reliable confidence regions around the 2SLS and LIML estimators for returns-to-schooling regardless of the quality of the instruments. The results indicate that the returns-to-schooling were between 8 and 25 percent in 1970 and between 4 and 14 percent in 1980. Although the estimates are less accurate than previously thought, most specifications by Angrist and Krueger (1991) are informative for returns-to-schooling. In particular, concern about the reliability of the model with 178 instruments is unfounded despite the low first-stage F-statistic. Finally, we briefly discuss bias-adjustment of estimators and pretesting procedures as solutions to the weak-instrument problem.

Suggested Citation

  • Luiz M. Cruz & Marcelo J. Moreira, 2005. "On the Validity of Econometric Techniques with Weak Instruments: Inference on Returns to Education Using Compulsory School Attendance Laws," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
  • Handle: RePEc:uwp:jhriss:v:40:y:2005:i:2:p393-410
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    References listed on IDEAS

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    1. Nelson, Charles R & Startz, Richard, 1990. "Some Further Results on the Exact Small Sample Properties of the Instrumental Variable Estimator," Econometrica, Econometric Society, vol. 58(4), pages 967-976, July.
    2. Chao, John & Swanson, Norman R., 2007. "Alternative approximations of the bias and MSE of the IV estimator under weak identification with an application to bias correction," Journal of Econometrics, Elsevier, pages 515-555.
    3. Jean-Marie Dufour, 1997. "Some Impossibility Theorems in Econometrics with Applications to Structural and Dynamic Models," Econometrica, Econometric Society, vol. 65(6), pages 1365-1388, November.
    4. Joshua D. Angrist & Alan B. Keueger, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 979-1014.
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    Cited by:

    1. Leigh, Andrew & Ryan, Chris, 2008. "Estimating returns to education using different natural experiment techniques," Economics of Education Review, Elsevier, pages 149-160.
    2. Chowdhury, Shyamal & Krause, Annabelle & Zimmermann, Klaus F, 2015. "Arsenic Contamination of Drinking Water and Mental Health," CEPR Discussion Papers 10978, C.E.P.R. Discussion Papers.
    3. Johnson, William C. & Xie, Wenjuan & Yi, Sangho, 2014. "Corporate fraud and the value of reputations in the product market," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 16-39.
    4. Dionissi Aliprantis, 2011. "Assessing the evidence on neighborhood effects from moving to opportunity," Working Paper 1101, Federal Reserve Bank of Cleveland.
    5. Philip Shaw & Marina‐Selini Katsaiti & Marius Jurgilas, 2011. "Corruption And Growth Under Weak Identification," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 264-275, January.
    6. Emla Fitzsimons & Marcos Vera-Hernandez, 2013. "Food for Thought? Breastfeeding and Child Development," IFS Working Papers W13/31, Institute for Fiscal Studies.
    7. Léandre BASSOLE & Jean-Louis ARCAND, 2006. "Does Community Driven Development Work? Evidence from Senegal," Working Papers 200606, CERDI.
    8. Arcand, Jean-Louis & Ai, Chunrong & Ethier, Francois, 2007. "Moral hazard and Marshallian inefficiency: Evidence from Tunisia," Journal of Development Economics, Elsevier, pages 411-445.
    9. Jean-Louis ARCAND & Marcel DAGENAIS, 2005. "Errors in Variables and the Empirics of Economic Growth," Working Papers 200536, CERDI.
    10. Summerhill, William, 2010. "Colonial Institutions, Slavery, Inequality, and Development: Evidence from São Paulo, Brazil," MPRA Paper 22162, University Library of Munich, Germany.
    11. Serneels, Pieter & Beegle, Kathleen & Dillon, Andrew, 2017. "Do returns to education depend on how and whom you ask?," Economics of Education Review, Elsevier, vol. 60(C), pages 5-19.
    12. Arcand, Jean-Louis & d'Hombres, Beatrice, 2006. "Testing for Separation in Agricultural Household Models and Unobservable Household-Specific Effects," MPRA Paper 1863, University Library of Munich, Germany.
    13. Nam-Hyun Kim & Winfried Pohlmeier, 2015. "A Regularization Approach to Biased Two-Stage Least Squares Estimation," Working Paper series 15-22, Rimini Centre for Economic Analysis.
    14. Philip Oreopoulos, 2006. "Estimating Average and Local Average Treatment Effects of Education when Compulsory Schooling Laws Really Matter," American Economic Review, American Economic Association, pages 152-175.
    15. Erik Alencar de Figueiredo & José Luis da Silva Netto Júnior, 2012. "More Equal But Not So Fair- an Analysis of Brazilian Income Distribution from 1995 to 2009," Série Textos para Discussão (Working Papers) 11, Programa de Pós-Graduação em Economia - PPGE, Universidade Federal da Paraíba.
    16. Erik Figueiredo & José Silva Netto Junior, 2014. "More equal but not so fair: an analysis of Brazilian income distribution from 1995 to 2009," Empirical Economics, Springer, pages 1325-1337.
    17. Wen You & George Davis, 2011. "Childhood Overweight: Does Quality of Parental Childcare Time Matter?," Journal of Family and Economic Issues, Springer, vol. 32(2), pages 219-232, June.
    18. Davis, George C. & You, Wen, 2013. "Estimates of returns to scale, elasticity of substitution, and the thrifty food plan meal poverty rate from a direct household meal production function," Food Policy, Elsevier, vol. 43(C), pages 204-212.
    19. Guilhem Bascle, 2008. "Controlling for endogeneity with instrumental variables in strategic management research," Post-Print hal-00576795, HAL.
    20. Chuang, Yih-chyi & Lai, Wei-wen, 2010. "Heterogeneity, comparative advantage, and return to education: The case of Taiwan," Economics of Education Review, Elsevier, vol. 29(5), pages 804-812, October.
    21. Dawood Mamoon & S. Mansoob Murshed, 2017. "When Education Explains Strong Institutions: Trade Policy also Matters," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 131(3), pages 1179-1210, April.
    22. Pu, Cheng-yun & Lan, Virginia & Chou, Yiing-Jenq & Lan, Chung-fu, 2008. "The crowding-out effects of tobacco and alcohol where expenditure shares are low: Analyzing expenditure data for Taiwan," Social Science & Medicine, Elsevier, pages 1979-1989.
    23. Rietveld, Cornelius A. & Webbink, Dinand, 2016. "On the genetic bias of the quarter of birth instrument," Economics & Human Biology, Elsevier, pages 137-146.

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