How Much Should We Trust TSTSLS Intergenerational Mobility Estimates?: Evidence From A Developing Country

30 Pages Posted: 11 Dec 2022

See all articles by Javier Cortes-Orihuela

Javier Cortes-Orihuela

University of British Columbia (UBC) - Vancouver School of Economics

Juan Díaz

University of Chile - Department of Management Control and Information Systems

Pablo Gutierrez Cubillos

University of Chile - Department of Management Control and Information Systems

Pablo Troncoso

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics

Gabriel Villarroel

Ministry of Finance, Chile

Date Written: November 24, 2022

Abstract

This paper revisits the Two-Sample Two-Stage Least Squares (TSTSLS) method, which is commonly used to estimate intergenerational mobility in the absence of parental earnings data. First, we decompose the TSTSLS intergenerational earnings elasticity (IGE) into the linked administrative data estimate, a projection bias, and a variance bias. We propose a parsimonious imputation procedure to eliminate the variance bias in the IGE and show that, under plausible conditions, the corrected TSTSLS IGE estimate provides a lower bound for the linked administrative IGE. Furthermore, we demonstrate that the uncorrected rank-rank correlation estimated through TSTSLS only exhibits projection bias, thus providing a lower bound to the linked administrative rank-rank correlation. Second, we use administrative data from a developing country to test our lower bound methodology through an Empirical Monte Carlo approach, confirming its validity. These estimates suggest that the following practices should be implemented when the TSTSLS method is used to estimate intergenerational mobility: i) report the variance bias corrected-IGE; and ii) report the results of the rank-rank cor- relation estimated through TSTSLS. Our empirical results shows that both estimates provide a lower bound for the linked administrative IGE and rank-rank correlation, respectively.

Keywords: Intergenerational Mobility, Linked Administrative Data, Two-Sample Two- Stage Least Squares

JEL Classification: J31, J61, J62

Suggested Citation

Cortes-Orihuela, Javier and Díaz, Juan and Gutierrez Cubillos, Pablo and Troncoso, Pablo and Villarroel, Gabriel, How Much Should We Trust TSTSLS Intergenerational Mobility Estimates?: Evidence From A Developing Country (November 24, 2022). Available at SSRN: https://ssrn.com/abstract=4285775 or http://dx.doi.org/10.2139/ssrn.4285775

Javier Cortes-Orihuela

University of British Columbia (UBC) - Vancouver School of Economics ( email )

6000 Iona Dr
Vancouver, BC V6T 1L4
Canada

Juan Díaz

University of Chile - Department of Management Control and Information Systems

Diagonal Paraguay 257
Santiago, 00001
Chile

Pablo Gutierrez Cubillos

University of Chile - Department of Management Control and Information Systems ( email )

Diagonal Paraguay 257
Santiago, 00001
Chile

Pablo Troncoso (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business - Department of Economics ( email )

Athens, GA 30602-6254
United States

Gabriel Villarroel

Ministry of Finance, Chile

Teatinos 120
Santiago, 8340487
Chile

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