Empirical Economics

, Volume 26, Issue 1, pp 7–40

Individual heterogeneity in the returns to schooling: instrumental variables quantile regression using twins data

  • Omar Arias
  • Kevin F. Hallock
  • Walter Sosa-Escudero

DOI: 10.1007/s001810000053

Cite this article as:
Arias, O., Hallock, K. & Sosa-Escudero, W. Empirical Economics (2001) 26: 7. doi:10.1007/s001810000053


Considerable effort has been exercised in estimating mean returns to education while carefully considering biases arising from unmeasured ability and measurement error. Recent work has investigated whether there are variations from the “mean” return to education across the population with mixed results. We use an instrumental variables estimator for quantile regression on a sample of twins to estimate an entire family of returns to education at different quantiles of the conditional distribution of wages while addressing simultaneity and measurement error biases. We test whether there is individual heterogeneity in returns to education and find that: more able individuals obtain more schooling perhaps due to lower marginal costs and/or higher marginal benefits of schooling and that higher ability individuals (those further to the right in the conditional distribution of wages) have higher returns to schooling consistent with a non-trivial interaction between schooling and unobserved abilities in the generation of earnings. The estimated returns are never lower than 9 percent and can be as high as 13 percent at the top of the conditional distribution of wages but they vary significantly only along the lower to middle quantiles. Our findings may have meaningful implications for the design of educational policies.

Key words: Returns to Education Human Capital Heterogeneity Quantile Treatment Effects Instrumental Variables. 
JEL classification: C14 I2 J24 J31 

Copyright information

© Springer-Verlag Berlin Heidelberg 2001

Authors and Affiliations

  • Omar Arias
    • 1
  • Kevin F. Hallock
    • 2
  • Walter Sosa-Escudero
    • 3
  1. 1.Inter-American Development Bank, 1300 New York Ave., NW, STOP E-0421, Washington, DC 20577 (email: omara@iadb.org)XX
  2. 2.Department of Economics, University of Illinois, 1206 South 6th Street, Champaign, IL 61820 (email: hallock@uiuc.edu)XX
  3. 3.Department of Economics, Universidad Nacional de la Plata, La Plata, Argentina (email: wsosa@feedback.net.ar)AR