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Ability Bias, Discount Rate Bias and the Return to Education

  • Lang, Kevin

I reconsider various methods for correcting for bias in estimates of the returns to schooling. I argue that the literature on ability bias has ignored complications implicit in theoretical formulations of the choice of human capital. In particular, such models imply that adding ability to the wage equation may not be informative about the importance of bias and that variables correlated with the discount rate will generally not be suitable instruments for education. Indeed discount rate variation may generate downward bias. Estimation of a structural wage/schooling model suggests that OLS estimates of the return to schooling are biased downwards.

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File URL: http://mpra.ub.uni-muenchen.de/24651/1/MPRA_paper_24651.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24651.

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Date of creation: 12 Mar 1993
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Handle: RePEc:pra:mprapa:24651
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  1. Angrist, Joshua D & Krueger, Alan B, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 979-1014, November.
  2. Willis, Robert J & Rosen, Sherwin, 1979. "Education and Self-Selection," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S7-36, October.
  3. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  4. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
  5. Joshua D. Angrist & Alan B. Krueger, 1992. "Estimating the Payoff to Schooling Using the Vietnam-Era Draft Lottery," NBER Working Papers 4067, National Bureau of Economic Research, Inc.
  6. J. A. Hausman & W. E. Taylor, 1980. "Panel Data and Unobservable Individual Effects," Working papers 255, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Griliches, Zvi & Mason, William M, 1972. "Education, Income, and Ability," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages S74-S103, Part II, .
  8. Lang, Kevin & Ruud, Paul A, 1986. "Returns to Schooling, Implicit Discount Rates and Black-White Wage Differentials," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 41-47, February.
  9. John Conlisk, 1971. "A Bit of Evidence on the Income-Education-Ability Interrelation," Journal of Human Resources, University of Wisconsin Press, vol. 6(3), pages 358-362.
  10. Hause, John C, 1972. "Earnings Profile: Ability and Schooling," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages S108-S38, Part II, .
  11. Boissiere, M & Knight, J B & Sabot, R H, 1985. "Earnings, Schooling, Ability, and Cognitive Skills," American Economic Review, American Economic Association, vol. 75(5), pages 1016-30, December.
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