Estimating Returns to Schooling When Schooling is Misreported


We propose a general method of moments technique to identify measurement error in self-reported
and transcript-reported schooling using differences in wages, test scores and other covariates to discern the
relative verity of each measure. We also explore the implications of such reporting errors for both OLS and
IV estimates of the returns to schooling. The results cast a new light on two common findings in the
extensive literature on the retums to schooling: “sheepskin effects” and the recent IV estimates, relying on
“natural experiments” to identify the payoff to schooling. First, respondents tend to self-report degree
attainment much more accurately than they report educational attainment not corresponding with degree
attainment. For instance, we estimate that more than 90 percent of those with associate’s or bachelor’s
degrees accurately report degree attainment, while only slightly over half of those with l or 2 years of college
credits accurately report their educational attainment. As a result, OLS estimates tend to understate returns
per year of schooling and overstate degree effects. Second, because the measurement error in educational
attainment is non-classical, IV estimates also tend to be biased, although the magnitude of the bias depends
upon the nature of the measurement error in the region of educational attainment affected by the instrument.

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