Income, Schooling, and Ability: Evidence from a New Sample of Twins

In this paper we set out a simple model of optimal schooling investments that emphasizes the interaction between schooling choices and income determination; and estimate it using a fresh sample of data on over 700 identical twins. According to the model, equally able individuals from the same family should attain the same observed schooling levels, apart from random errors of optimization or measurement. A variety of direct and indirect tests provides no evidence against this hypothesis. We estimate an average return to schooling of 10% for genetically identical individuals, but estimated returns are slightly higher for less able individuals. Unlike the results in Ashenfelter and Krueger (1994), which were based on a much smaller sample, we estimate that schooling is positively correlated with ability level, so that simple cross-section estimates are slightly upward biased. Taken together these empirical results imply that more able individuals attain more schooling because they face lower marginal costs of schooling, not because they obtain higher marginal benefits. The results stand in sharp contrast to recent claims that genetic factors predetermine education and income, and that such differences are not amenable to alteration by public or private choices.