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Proxying Ability by Family Background in Returns to Schooling Estimations is Generally a Bad Idea *
Author(s) -
Mellander Erik,
SandgrenMassih Sofia
Publication year - 2008
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/j.1467-9442.2008.00564.x
Subject(s) - econometrics , omitted variable bias , observational error , economics , value (mathematics) , statistics , instrumental variable , mathematics
When schooling is measured with error and data on ability are lacking, return to schooling estimates will be subject to positive omitted variable bias (OVB) and negative measurement error bias (MEB). We investigate how these biases are affected when ability is proxied by family background variables. We show that the effect on OVB is uncertain, while MEB invariably increases in magnitude. Our empirical analysis demonstrates that MEB generally dominates OVB. With more background variables or increased measurement error, the total bias rapidly becomes negative and increasing in magnitude, thereby driving the return estimate further and further away from the true value.