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Earnings Functions, Rates of Return and Treatment Effects: The Mincer Equation and Beyond

  • James J. Heckman
  • Lance J. Lochner
  • Petra E. Todd

This paper considers the interpretation of "Mincer rates of return." We test and reject the Mincer model. It fails to track the time series of true returns. We show how repeated cross section and panel data improves the ability of analysts to estimate the ex ante and ex post marginal rate of returns. Accounting for sequential revelation of information calls into question the validity of the internal rate of return as a tool for policy analysis. The large estimated psychic costs of schooling found in recent work helps to explain why persons do not attend school even though the financial rewards for doing so are high. We present methods for computing distributions of ex post and ex ante returns.

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File URL: http://www.nber.org/papers/w11544.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11544.

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Date of creation: Aug 2005
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Publication status: published as Heckman, James J. & Lochner, Lance J. & Todd, Petra E., 2006. "Earnings Functions, Rates of Return and Treatment Effects: The Mincer Equation and Beyond," Handbook of the Economics of Education, Elsevier.
Handle: RePEc:nbr:nberwo:11544
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