Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/95127
Authors: 
Mellander, Erik
Year of Publication: 
1998
Series/Report no.: 
IUI Working Paper 494
Abstract: 
Lam and Schoeni (1993) consider an equation where earnings are explained by schooling and ability. They assume that ability data are lacking and that schooling is measured with error. The estimate obtained by regressing earnings on schooling thus contains omitted variable bias (OVB), which is positive, and measurement error bias (MEB), which is negative. Adding a family background variable to proxy for ability is claimed to: i) decrease the OVB towards, but not below, zero and ii) make the MEB even more negative. This note claims that while ii) is true, even in the context of multiple family background variables, i) is in general incorrect. The OVB may increase in magnitude and/or change sign. Conditions are provided under which i) holds. A simulation procedure is suggested that will yield consistent estimates of the total bias and its components, conditional upon values on the true return and the measurement error variance.
Subjects: 
data
Proxy variables
Measurement error
Partial correlations
Simulations
JEL: 
C13
C20
J31
Document Type: 
Working Paper

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