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Estimating distributions of potential outcomes using instrumental variables with an application to changes in college enrolment and wage inequality

Authors: Pedro Carneiro and Sokbae 'Simon' Lee
Date: 01 April 2009
Type: Journal Articles, Journal of Econometrics,  Vol. 149, No. 2, pp. 191-208

Abstract

This paper extends the method of local instrumental variables developed by Heckman and Vytlacil [Heckman, J., Vytlacil E., 2005. Structural equations, treatment, effects and econometric policy evaluation. Econometrica 73(3), 669-738] to the estimation of not only means, but also distributions of potential outcomes. The newly developed method is illustrated by applying it to changes in college enrollment and wage inequality using data from the National Longitudinal Survey of Youth of 1979. Increases in college enrollment cause changes in the distribution of ability among college and high school graduates. This paper estimates a semiparametric selection model of schooling and wages to show that, for fixed skill prices, a 14% increase in college participation (analogous to the increase observed in the 1980s), reduces the college premium by 12% and increases the 90-10 percentile ratio among college graduates by 2%.

Full version (external link)

Previous version: Pedro Carneiro and Sokbae 'Simon' Lee, January 2009,  Estimating distributions of potential outcomes using local instrumental variables with an application to changes in college enrollment and wage inequality,  cemmap Working Papers , CWP01/09

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