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Family Background Variables as Instruments for Education in Income Regressions: A Bayesian Analysis

Author

Listed:
  • Lennart Hoogerheide

    (Econometric Institute, Erasmus University Rotterdam)

  • Joern H. Block

    (CASBEC, Erasmus University Rotterdam, and Technische Universitaet Muenchen, Germany)

  • Roy Thurik

    (CASBEC, Erasmus University Rotterdam, EIM Business and Policy Research, Zoetermeer, and Max Planck Institute of Economics, Jena, Germany)

Abstract
This discussion paper was published in the Economics of Education Review , 2012, 31(5), 515-523. The validity of family background variables instrumenting education in income regressions has been much criticized. In this paper, we use data of the 2004 German Socio-Economic Panel and Bayesian analysis in order to analyze to what degree violations of the strong validity assumption affect the estimation results. We show that, in case of moderate direct effects of the instrument on the dependent variable, the results do not deviate much from the benchmark case of no such effect (perfect validity of the instrument). The size of the bias is in many cases smaller than the standard error of education’s estimated coefficient. Thus, the violation of the strict validity assumption does not necessarily lead to strongly different results when compared to the strict validity case. This provides confidence in the use of family background variables as instruments in income regressions.

Suggested Citation

  • Lennart Hoogerheide & Joern H. Block & Roy Thurik, 2010. "Family Background Variables as Instruments for Education in Income Regressions: A Bayesian Analysis," Tinbergen Institute Discussion Papers 10-075/3, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20100075
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    education; family background variables; earnings; income; instrumental variables; Bayesian analysis;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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