Nber Working Paper Series Estimating Marginal Returns to Education

This paper estimates the marginal returns to college for individuals induced to enroll in college by different marginal policy changes. The recent instrumental variables literature seeks to estimate this parameter, but in general it does so only under strong assumptions that are tested and found wanting. We show how to utilize economic theory and local instrumental variables estimators to estimate the effect of marginal policy changes. Our empirical analysis shows that returns are higher for individuals with values of unobservables that make them more likely to attend college. We contrast the returns to well-defined marginal policy changes with IV estimates of the return to schooling. Some marginal policy changes inducing students into college produce very low returns. Pedro Carneiro Department of Economics University College Gower Street London WC1E 6BT United Kingdom [email protected] James J. Heckman Department of Economics The University of Chicago 1126 E. 59th Street Chicago, IL 60637 and University College Dublin and IZA and also NBER [email protected] Edward J. Vytlacil Department of Economics Yale University Box 208281 New Haven, CT 06520-8281 and NBER [email protected] An online appendix is available at: http://www.nber.org/data-appendix/w16474 Estimating Marginal Returns to Education By Pedro Carneiro and James J. Heckman and Edward Vytlacil∗ Draft: October 14, 2010 This paper estimates the marginal returns to college for individuals induced to enroll in college by different marginal policy changes. The recent instrumental variables literature seeks to estimate this parameter, but in general it does so only under strong assumptions that are tested and found wanting. We show how to utilize economic theory and local instrumental variables estimators to estimate the effect of marginal policy changes. Our empirical analysis shows that returns are higher for individuals with values of unobservables that make them more likely to attend college. We contrast the returns to well-defined marginal policy changes with IV estimates of the return to schooling. Some marginal policy changes inducing students into college produce very low returns. JEL: J31