Instrumental Variables Methods for the Correlated Random Coefficient Model: Estimating the Average Rate of Return to Schooling When the Return is Correlated with Schooling

Abstract

This paper considers the use of instrumental variables to identify a correlated random coefficients model in which coefficients are correlated with (or stochastically dependent on) the regressors. A correlated random coefficients model is central to the human capital earnings model. Conditions are given under which instrumental variables identify the average rate of return. These conditions are applied to David Card's version of Gary Becker's Woytinsky lecture.