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

Economics of Education Review, Vol. 31, Issue 5, pp. 515-523

18 Pages Posted: 15 Aug 2010 Last revised: 5 Jan 2013

See all articles by Lennart F. Hoogerheide

Lennart F. Hoogerheide

VU University Amsterdam

Jorn H. Block

University of Trier - Faculty of Management; Erasmus University Rotterdam (EUR) - Institute of Management (ERIM)

Roy Thurik

Montpellier Business School; Erasmus University Rotterdam (EUR) - Centre for Advanced Small Business Economics (CASBEC); Erasmus Research Institute of Management (ERIM); EIM Netherlands - Business and Policy Research; Tinbergen Institute

Date Written: August 15, 2010

Abstract

The validity of family background variables instrumenting education in income regressions has been much criticized. In this paper, we use data from the 2004 German Socio-Economic Panel and Bayesian analysis to analyze to what degree violations of the strict 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’s exclusion restriction). In many cases, the size of the bias is smaller than the width of the 95% posterior interval for the effect of education on income. Thus, a violation of the strict validity assumption does not necessarily lead to results which are strongly different from those of the strict validity case. This finding provides confidence in the use of family background variables as instruments in income regressions.

Keywords: education, family background variables, earnings, income, instrumental variables, Bayesian analysis

JEL Classification: C11, C13, C15, J24, J30

Suggested Citation

Hoogerheide, Lennart F. and Block, Jorn Hendrich and Thurik, Roy, Family Background Variables as Instruments for Education in Income Regressions: A Bayesian Analysis (August 15, 2010). Economics of Education Review, Vol. 31, Issue 5, pp. 515-523, Available at SSRN: https://ssrn.com/abstract=1659243 or http://dx.doi.org/10.2139/ssrn.1659243

Lennart F. Hoogerheide

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Jorn Hendrich Block (Contact Author)

University of Trier - Faculty of Management ( email )

D-54296
Germany

Erasmus University Rotterdam (EUR) - Institute of Management (ERIM) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Roy Thurik

Montpellier Business School

France

Erasmus University Rotterdam (EUR) - Centre for Advanced Small Business Economics (CASBEC) ( email )

3000 DR Rotterdam
Netherlands
+31 10 408 2232 (Phone)
+31 10 408 9146 (Fax)

HOME PAGE: http://www.thurik.com

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

EIM Netherlands - Business and Policy Research

Postbus 7001
2701 AA Zoetermeer
Netherlands
+31 79 341 3634 (Phone)
+31 79 331 3742 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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