Estimating the Returns to College Quality with Multiple Proxies for Quality

Existing studies of the effects of college quality on earnings typically rely on a single proxy variable for college quality. This study questions the wisdom of this approach given that a single proxy likely measures college quality with substantial error. We begin by considering the parameter of interest and its relation to the parameter estimated in the literature; this analysis reveals the potential for substantial bias. We then consider three econometric approaches to the problem that involve the use of multiple proxies for college quality: combining the multiple proxies via factor analysis, using the additional proxies as instruments, and a GMM estimator derived from a structural measurement error model that generalizes the classical measurement error model. Our estimates suggest that the existing literature understates the earnings effects of college quality.