Nature, nurture and market conditions: Ability and education in the policy evaluation approach

The present paper follows the rationality of the Human Capital Theory to explain the heterogeneity of returns to schooling in a policy evaluation model with the purpose of testing whether people are blocked in any way (credit constraints, uncertainty or other market environment conditions) when they make their schooling choices. The minimal assumption that abler people face lower costs of schooling guarantees the possibility of making the right choice in this framework. The empirical implications of the model are extended further from the properties of ordinary least squares and instrumental variable estimators and centred on predictions about the sign of different policy evaluation parameters (sorting gains and selection biases) and on the shape and variability of marginal returns to education. Within this framework, the paper revises the modern empirical literature on returns to schooling in combination with the theoretical literature on human capital. Empirical evidence for the U.S., shown by a binary choice model, supports the assumption. Evidence obtained from Spanish data in a sequential choice setting does not support the assumption.