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The distinction between dictatorial and incentive policy interventions and its implication for IV estimation

  • Christian Belzil

    (Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS, ENSAE - École Nationale de la Statistique et de l'Administration Économique - ENSAE ParisTech, IZA - Institute for the Study of Labor)

  • J. Hansen

    (IZA - Institute for the Study of Labor, CIREQ - Centre Interuniversitaire de Recherche en Economie Quantitative, CIRANO - Montréal, Department of Economics, Concordia University - CONCORDIA UNIVERSITY)

We investigate if, and under which conditions, the distinction between dictatorial and incentive-based policy interventions, affects the capacity of Instrument Variable (IV) methods to estimate the relevant treatment effect parameter of an outcome equation. The analysis is set in a non-trivial framework, in which the right-hand side variable of interest is affected by selectivity, and the error term is driven by a sequence of unobserved life-cycle endogenous choices. We show that, for a wide class of outcome equations, incentive-based policies may be designed so to generate a sufficient degree of post-intervention randomization (a lesser degree of selection on individual endowments among the sub-population affected). This helps the instrument to fulfill the orthogonality condition. However, for a same class of outcome equation, dictatorial policies that enforce minimum consumption cannot meet this condition. We illustrate these concepts within a calibrated dynamic life cycle model of human capital accumulation, and focus on the estimation of the returns to schooling using instruments generated from mandatory schooling reforms and education subsidies. We show how the nature of the skill accumulation process (substitutability vs complementarity) may play a fundamental role in interpreting IV estimates of the returns to schooling.

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Paper provided by HAL in its series Working Papers with number hal-00463877.

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Date of creation: 15 Mar 2010
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Handle: RePEc:hal:wpaper:hal-00463877
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  1. Flavio Cunha & James J. Heckman & Susanne M. Schennach, 2010. "Estimating the Technology of Cognitive and Noncognitive Skill Formation," Econometrica, Econometric Society, vol. 78(3), pages 883-931, 05.
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  4. Belzil, Christian, 2006. "The Return to Schooling in Structural Dynamic Models: A Survey," IZA Discussion Papers 2370, Institute for the Study of Labor (IZA).
  5. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
  6. Christian Belzil & Jörgen Hansen, 2004. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model," Working Papers 0405, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
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  13. 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.
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