Ability Bias, Discount Rate Bias and the Return to Education

Lang, Kevin (1993): Ability Bias, Discount Rate Bias and the Return to Education.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: instrumental variables; returns to schooling; discount rates; ability bias
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C31 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions ; Social Interaction Models; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General

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