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Using heteroscedasticity to estimate the returns to education

  • Vincent (Vincent Peter) Hogan
  • Roberto Rigobon

We apply a new estimator to the measurement of the economic returns to education. We control for endogenous education, unobserved ability and measurement error using only the natural heteroscedasticty of wages and education attainment. Our prefered estimate, 6.07%, is closer to the OLS estimate but smaller (and more precise) than the estimates typically reported by studies that use IV. Our results indicate that the biases generated by unobserved ability and measurement error tend to cancel each other out as suggested by Griliches (1977). We also present Monte Carlo evidence to show that the finite sample bias our estimator is small.

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Paper provided by School of Economics, University College Dublin in its series Working Papers with number 200301.

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Date of creation: Jan 2003
Date of revision:
Handle: RePEc:ucn:wpaper:200301
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  1. Hogan, Vincent & Ian Walker, 2002. "Education Choice under Uncertainty," Royal Economic Society Annual Conference 2002 103, Royal Economic Society.
  2. Roberto Rigobon & Brian P. Sack, 2002. "The Impact of Monetary Policy on Asset Prices," NBER Working Papers 8794, National Bureau of Economic Research, Inc.
  3. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
  4. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," CIRANO Working Papers 2002s-19, CIRANO.
  5. Colm Harmon & Ian Walker, 1995. "Estimates of the economic return to schooling for the United Kingdom," Open Access publications 10197/647, School of Economics, University College Dublin.
  6. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-33, July.
  7. Charles F. Manski & John V. Pepper, 1998. "Monotone Instrumental Variables: With an Application to the Returns to Schooling," Virginia Economics Online Papers 308, University of Virginia, Department of Economics.
  8. Sentana, Enrique & Fiorentini, Gabriele, 2001. "Identification, estimation and testing of conditionally heteroskedastic factor models," Journal of Econometrics, Elsevier, vol. 102(2), pages 143-164, June.
  9. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-60, September.
  10. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  11. Harmon, C & Ian Walker, 1995. "Estimates of the economic return to schooling for the UK," IFS Working Papers W95/12, Institute for Fiscal Studies.
  12. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  13. Esther Duflo, 2001. "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment," American Economic Review, American Economic Association, vol. 91(4), pages 795-813, September.
  14. Christian Belzil, 2002. "Unobserved Ability and the Return to schooling++," Post-Print hal-00541872, HAL.
  15. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  16. Rummery, Sarah & Vella, Francis & Verbeek, Marno, 1999. "Estimating the returns to education for Australian youth via rank-order instrumental variables," Labour Economics, Elsevier, vol. 6(4), pages 491-507, November.
  17. Joshua Angrist & Alan Krueger, 1990. "Does Compulsory School Attendance Affect Schooling and Earnings?," Working Papers 653, Princeton University, Department of Economics, Industrial Relations Section..
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