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Ability Bias, Discount Rate Bias and the Return to Education

Author

Listed:
  • Lang, Kevin

Abstract

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.

Suggested Citation

  • Lang, Kevin, 1993. "Ability Bias, Discount Rate Bias and the Return to Education," MPRA Paper 24651, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:24651
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    File URL: https://mpra.ub.uni-muenchen.de/24651/1/MPRA_paper_24651.pdf
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    References listed on IDEAS

    as
    1. Joshua D. Angrist & Alan B. Krueger, 1991. "Estimating the Payoff to Schooling Using the Vietnam-era Draft Lottery," Working Papers 670, Princeton University, Department of Economics, Industrial Relations Section..
    2. Willis, Robert J & Rosen, Sherwin, 1979. "Education and Self-Selection," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 7-36, October.
    3. Griliches, Zvi & Mason, William M, 1972. "Education, Income, and Ability," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages 74-103, Part II, .
    4. 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.
    5. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-1398, November.
    6. Hause, John C, 1972. "Earnings Profile: Ability and Schooling," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages 108-138, Part II, .
    7. 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.
    8. 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 1016-1030, December.
    9. repec:fth:prinin:304 is not listed on IDEAS
    10. 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..
    11. repec:fth:prinin:290 is not listed on IDEAS
    12. 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.
    13. Joshua Angrist & Alan Krueger, 1991. "Estimating the Payoff to Schooling Using the Vietnam-era Draft Lottery," Working Papers 670, Princeton University, Department of Economics, Industrial Relations Section..
    14. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    instrumental variables; returns to schooling; discount rates; ability bias;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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