Identifying and Estimating the Distributions of Ex Post and Ex Ante Returns to Schooling

This paper surveys a recent body of research by Carneiro, Hansen, and Heckman [Carneiro, P., K. Hansen, and J.J. Heckman, 2001, Fall. Removing the veil of ignorance in assessing the distributional impacts of social policies. Swedish Economic Policy Review 8 (2), 273–301., Carneiro, P., K. Hansen, and J.J. Heckman, 2003, May. Estimating distributions of treatment effects with an application to the returns to schooling and measurement of the effects of uncertainty on college choice. International Economic Review 44 (2), 361–422. 2001 Lawrence R. Klein Lecture], Cunha and Heckman [Cunha, F. and J.J. Heckman, 2006. The evolution of earnings risk in the US economy. Presented at the 9th World Congress of the Econometric Society, London], Cunha, Heckman, and Navarro [Cunha, F., J.J. Heckman, and S. Navarro, 2004, March. Separating heterogeneity from uncertainty in an aiyagari–laitner economy. Presented at the Goldwater Conference on Labor Markets, Arizona., Cunha, F., J.J. Heckman, and S. Navarro, 2005, April. Separating uncertainty from heterogeneity in life cycle earnings, The 2004 Hicks Lecture. Oxford Economic Papers 57 (2), 191–261., Cunha, F., J.J. Heckman, and S. Navarro, 2006. Counterfactual analysis of inequality and social mobility. In S.L. Morgan, D.B. Grusky, and G.S. Fields (Eds.), Mobility and Inequality: Frontiers of Research in Sociology and Economics, Chapter 4, pp. 290–348. Stanford, CA: Stanford University Press], Heckman and Navarro [Heckman, J.J. and S. Navarro, 2007, February. Dynamic discrete choice and dynamic treatment effects. Journal of Econometrics 136 (2), 341–396] and Navarro [Navarro, S., 2005. Understanding Schooling: Using Observed Choices to Infer Agent's Information in a Dynamic Model of Schooling Choice When Consumption Allocation is Subject to Borrowing Constraints. Ph.D. Dissertation, University of Chicago, Chicago, IL] that identifies and estimates the ex post distribution of returns to schooling and determines ex ante distributions of returns on which agents base their schooling choices. We discuss methods and evidence, and state a fundamental identification problem concerning the separation of preferences, market structures and agent information sets. For a variety of market structures and preference specifications, we estimate that over 50% of the ex post variance in returns to college are forecastable at the time agents make their schooling choices.     

Disentangling Treatment Effects of Active Labor Market Policies: The Role of Labor Force Status Sequences

This paper estimates treatment effects of two active labor market policies – a training program and a wage subsidy scheme – on participants' employment probabilities. The analysis is based on unique data from the 18th wave of the Polish Labor Force Survey containing detailed and extensive individual labor force status histories. We discuss two variants of an exact covariate matching procedure adapted to the specific nature of the data. Our study confirms and reinforces a point raised in recent research [Heckman, J.J., Smith, J.A. The Pre-programme Earnings Dip and the Determinants of Participation in a Social Programme: Implications for Simple Programme Evaluation Strategies. The Economic Journal 1999; 109; 313-348., Heckman, J.J., Smith, J.A. The Determinants of Participation in a Social Program: Evidence from a Prototypical Job Training Program. Journal of Labor Economics 2004; 22; 243-298.], that pre-treatment labor force status dynamics play a decisive role in determining program participation. We implement a conditional difference-in-differences estimator of treatment effects based on these individual trinomial sequences of pre-treatment labor market status. The estimator employs a “moving window” technique that nicely controls for changes in the macroeconomic environment over time. Our findings suggest that training raises individual employment probability, while wage subsidies display negative treatment effects for participants in the Polish case.     

Programme Evaluation with Unobserved Heterogeneity and Selective Implementation: The Mexican PROGRESA Impact on Child Nutrition

This paper considers the impact of Programa de Educación, Salud y Alimentación ( PROGRESA ), a large Mexican rural anti-poverty programme that had an evaluation sample in which overall treatment was randomly assigned to some communities but not others, on child nutrition. When we examine the impact of PROGRESA based on the presumption of randomized allocations, we find that PROGRESA had no or even a negative impact on child nutrition. However, not all children designated to receive nutritional supplements actually did so. Our preferred estimates – child fixed-effects estimates that control for unobserved heterogeneity that is correlated with access to the supplement – indicate a significantly positive and fairly substantial programme effect of the nutritional supplements on children 12–36 months. They imply an increase of about a sixth in mean growth per year for these children and a lower probability of stunting. Effects are somewhat larger for children from poorer communities but whose mothers are functionally literate. The long-term consequences of these improvements are non-trivial; its impact working through adult height alone could result in a 2.9% increase in lifetime earnings.     

Modelling conditional skewness: Heterogeneous beliefs,short sale restrictions and market declines

This paper tests the relationship among heterogeneous beliefs, short sale restrictions and time-varying conditional skewness under different market conditions. The results show that heterogeneous beliefs and short sale restrictions have negative impacts on conditional skewness during periods of market decline but have negative, positive or no impacts during periods of market growth. This evidence reconciles conflicting evidence in recent empirical studies on the relationship among heterogeneous beliefs, short sale restrictions and conditional skewness.     

Generalised residuals and heterogeneous duration models: With applications to the Weilbull model

This paper deals with models for the duration of an event that are misspecified by the neglect of random multiplicative heterogeneity in the hazard function. This type of misspecification has been widely discussed in the literature [e.g., Heckman and Singer (1982), Lancaster and Nickell (1980)], but no study of its effect on maximum likelihood estimators has been given. This paper aims to provide such a study with particular reference to the Weibull regression model which is by far the most frequently used parametric model [e.g., Heckman and Borjas (1980), Lancaster (1979)]. In this paper we define generalised errors and residuals in the sense of Cox and Snell (1968, 1971) and show how their use materially simplifies the analysis of both true and misspecified duration models. We show that multiplicative heterogeneity in the hazard of the Weibull model has two errors in variables interpretations. We give the exact asymptotic inconsistency of M.L. estimation in the Weibull model and give a general expression for the inconsistency of M.L. estimators due to neglected heterogeneity for any duration model to O(σ²), where σ² is the variance of the error term. We also discuss the information matrix test for neglected heterogeneity in duration models and consider its behaviour when σ²>0.     

Solving the incomplete markets model with aggregate uncertainty using the Krusell–Smith algorithm

This paper studies the properties of the solution to the heterogeneous agents model in Den Haan et al. [2009. Computational suite of models with heterogeneous agents: incomplete markets and aggregate uncertainty. Journal of Economic Dynamics and Control, this issue]. To solve for the individual policy rules, we use an Euler-equation method iterating on a grid of pre-specified points. To compute the aggregate law of motion, we use the stochastic-simulation approach of Krusell and Smith [1998. Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106, 868–896]. We also compare the stochastic- and non-stochastic-simulation versions of the Krusell–Smith algorithm, and we find that the two versions are similar in terms of their speed and accuracy.     

CEO Retirement,Corporate Governance and Conditional Accounting Conservatism

Based on 16,604 observations between 1994 and 2006, this study revisits the ‘horizon problem’ by examining how CEO retirement affects conditional accounting conservatism. We hypothesize and find that firms become less conservative in their financial reporting before the retirement of their CEOs, and that strong corporate governance mitigates the effect of CEO retirement. The literature concerning the horizon problem has suggested that CEOs manipulate earnings to boost short-term performance before they leave their companies (Dechow, P. M., & Sloan, R. G. (1991). Executive incentives and the horizon problem: An empirical investigation. Journal of Accounting and Economics, 14(1), 51–89; Smith, C. W., & Watts, R. L. (1982). Incentive and tax effects of executive compensation plans. Australian Journal of Management, 7(2), 139–157), but the evidence is mixed. By examining conditional conservatism, we avoid some of the methodological difficulties that confront researchers when examining either real or accrual earnings management. Ours is the first study to provide evidence on how the horizon problem shapes conditional accounting conservatism.     

Age-dependent skill formation and returns to education

This study investigates the distribution of returns to investments in cognitive and self-regulatory skills over the life cycle. In our simulation model, the distribution of returns to education results from the interaction of neurobiological and socioeconomic factors in age-dependent skill formation. A novel feature of our extension of the technology of skill formation [Cunha, F., Heckman, J.J., 2007. The technology of skill formation. The American Economic Review 97 (2), 31–47] is a life span model that integrates skill depreciation at older ages and calibrates it to German data. Our evidence quantitatively illustrates the role early childhood plays in the shaping of human capital formation, inequality and economic growth.     

ESTIMATING PERSON‐CENTERED TREATMENT (PeT) EFFECTS USING INSTRUMENTAL VARIABLES: AN APPLICATION TO EVALUATING PROSTATE CANCER TREATMENTS

This paper builds on the methods of local instrumental variables developed by Heckman and Vytlacil (1999, 2001, 2005) to estimate person‐centered treatment (PeT) effects that are conditioned on the person's observed characteristics and averaged over the potential conditional distribution of unobserved characteristics that lead them to their observed treatment choices. PeT effects are more individualized than conditional treatment effects from a randomized setting with the same observed characteristics. PeT effects can be easily aggregated to construct any of the mean treatment effect parameters and, more importantly, are well suited to comprehend individual‐level treatment effect heterogeneity. The paper presents the theory behind PeT effects, and applies it to study the variation in individual‐level comparative effects of prostate cancer treatments on overall survival and costs. Copyright © 2013 John Wiley & Sons, Ltd.     

IMPACT OF FINANCIAL INCLUSION IN LOW- AND MIDDLE-INCOME COUNTRIES: A SYSTEMATIC REVIEW OF REVIEWS

Financial inclusion programmes seek to increase access to financial services such as credit, savings, insurance and money transfers. Despite a wealth of systematic review evidence, the impacts of financial inclusion are inconclusive. Hence, the first systematic review of systematic reviews was undertaken to synthesize the impacts of financial inclusion interventions on economic, social, gender and behavioural outcomes. Thirty-two systematic reviews were identified. The headline finding is that impacts are more likely to be positive than negative, but the effects vary, and appear not to be transformative in scope or scale, as they largely occur in the early stages of the causal chain. The effects of financial services on core economic and social poverty indicators are small and inconsistent. There is no evidence for meaningful behaviour-change outcomes. The effects on women's empowerment appear generally positive, but they depend upon programme features that are often peripheral to the financial service, and cultural and geographical context. Accessing savings opportunities has small but more consistently positive effects for poor people, and bears fewer downside risks for clients than credit. The inconsistent quality of the primary evidence base that formed the basis of their syntheses raises concerns about the reliability of the overall findings.     

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

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%.     

Nonlinear relationship between economic growth and nuances of globalisation with income stratification: Roles of financial development and governance

We study the effect of overall globalisation on economic growth in a neoclassical macroeconomic growth model. We further assess our model by considering the decomposed measures of globalisation including economic, political, and social globalisation components. To this end, we estimate panel data models by applying the cross-sectional dependency-autoregressive distributed lags (CS-ARDL) approach to a sample of 116 countries during the available period, 1980–2015. We classified our sample into upper middle-, lower middle-, and high-income groups to minimise country-specific heterogeneity. Our results affirm the presence of a quadratic (nonlinear) U-shaped relationship between the overall globalisation (including the economic, political, social components) and economic growth for the lower middle- and upper middle-income group. However, they provide evidence of a positive linear relationship between globalisation and economic growth for the high-income countries. Given the arguments that the impact of globalisation on growth is conditional on local financial development (FD) and quality of governance (QoG), we incorporate their role. We provide fresh evidence that the impacts of globalisation on economic growth are more profound in the countries with a higher QoG and a higher deepening of FD. We further check the robustness of our analysis applying the U test and dynamic generalised methods of moment approach. We also provide policy implications.     

Ineligibles and eligible non-participants as a double comparison group in regression-discontinuity designs

In a sharp regression-discontinuity design (RDD) the participation status deterministically depends on whether a pre-programme characteristic is above or below a specified threshold. The attractiveness of such a design rests on close similarities with a formal experiment. Nevertheless, it is of limited applicability since participation into a programme is seldom determined according to this rule. Besides, in the presence of heterogeneous effects a sharp RDD only allows identification of mean effects for individuals around the threshold for participation. Two results are presented in this paper, and they both partially overcome the two limitations described above. We show that when individuals self-select into participation conditional on some eligibility criteria a sharp RDD provides a natural framework to define a specification test for the non-experimental estimation of programme effects for participants away from the threshold. We also show that, in this set-up, the regularity conditions required for the identification of the mean counterfactual outcome for participants marginally eligible for the programme are essentially the same as in a sharp RDD.     

Threshold arch models and asymmetries in volatility

This paper attempts to enlarge the class of Threshold Heteroscedastic Models (TARCH) introduced by Zakoían (1991a). We show that it is possible to relax the positivity constraints on the parameters of the conditional variance. Unconstrained models provide a greater generality of the paths allowing for nonlinearities in the volatility. Cyclical behaviour is permitted as well as different relative impacts of positive and negative shocks on volatility, depending on their size. We give empirical evidence using French stock returns.     

Market efficiency,asset returns,and the size of the risk premium in global equity markets

An important economic insight is that observed equity prices must equal the present value of the cash flows associated with the equity claim. An implication of this insight is that present values of cash flows must also quantitatively justify the observed volatility and cross-correlations of asset returns. In this paper, we show that parametric economic models for present values can indeed account for the observed high ex post return volatility and cross-correlation observed across five major equity markets—the U.S., the U.K., France, Germany, and Japan. We present evidence that cash flow growth rates contain a small predictable long-run component; this feature, in conjunction with time-varying systematic risk, can justify key empirical characteristics of observed equity prices. Our model also has direct implications for the level of equity prices and specific versions of the model can, in many cases, capture observed price levels. Our evidence suggests that the ex ante risk premium on the global market portfolio has dropped considerably—we show that this fall in the risk premium is related to a decline in the conditional variance of global real cash flow growth rates.     

Book Review Essay

Book reviewed in this article: Policy, politics and urban restructuring: Boddy, M., Lovering, J. and Basset, K. Policy, politics and urban restructuring: Buck, N., Gordon, I. and Young, K. with Ermisch, J. and Mills, L. Policy, politics and urban restructuring: Lever, W. and Moore, C. Policy, politics and urban restructuring: Robinson, F., Wren, C. and Goddard, J. Policy, politics and urban restructuring: Spencer, K., Taylor, A., Smith, B., Mawson, J., Flynn, N. and Batley, R. Policy, politics and urban restructuring: Hausner, V. and members of the ESRC Inner Cities Research Programme     

Heterogeneous economic returns to higher education: evidence from Italy

This paper uses official Italian micro data and different methods to estimate, in the framework of potential outcomes, the marginal return to college education allowing for heterogeneous returns and for self-selection into higher education. Specifically, the paper is focused on the estimation of heterogeneity of average treatment effect (ATE) on a cohort of college and high school graduates using the 2008 survey on household, income and wealth of the Bank of Italy. Methodologically, this study was carried out by using both propensity-score-based (PS-based) methods and a new approach based on marginal treatment effects (MTE), recently proposed by Heckman and his associates as a useful strategy when the ignorability assumption may be violated. In the PS-based approach, heterogeneous treatment effects are estimated in three different manners: the traditional stratification approach (propensity score strata), the regression adjustment within propensity score strata and, finally, a non-parametric smoothing approach. In the MTE approach, the treatment effect heterogeneity across individuals is estimated in a parametric as well as a semi-parametric strategy. Our empirical analysis shows that the estimated heterogeneity is substantial: following MTE based results (quite representative of other methods) the return to college graduation for a randomly selected individual varies from as high as 20 % (for persons who would add one fifth of wage from graduating college) to as low as ?22 % (for persons who would lose from college graduation), suggesting that returns are higher for individuals more likely to attend college. Furthermore, the results of different methods show very low (point) estimates of ATE: average college returns vary from 3.5 % by the PS-smoothing method to 1.8 % by the parametric MTE method, which also leads a greater treatment effect on treated (5.5 %), a moderate, but significant sorting gain and a negligible selection bias.     

Earnings volatility in America: Evidence from matched CPS

We offer new evidence on earnings volatility of men and women in the United States over the past four decades by using matched data from the March Current Population Survey. We construct a measure of total volatility that encompasses both permanent and transitory instability, and that admits employment transitions and losses from self employment. We also present a detailed decomposition of earnings volatility to account for changing shares in employment probabilities, conditional variances of continuous workers, and conditional mean variances from employment entry and exit. Our results show that earnings volatility among men increased by 15% from the early 1970s to mid 1980s, while women's volatility fell, and each stabilized thereafter. However, this pooled series masks important heterogeneity in volatility levels and trends across education groups and marital status. We find that men's earnings volatility is increasingly accounted for by employment transitions, especially exits, while the share of women's volatility accounted for by continuous workers rose, each of which highlights the importance of allowing for periods of non-work in volatility studies.     

Aggregation of heterogeneous beliefs

This paper is a generalization of [Calvet, L., Grandmont, J.-M., Lemaire, I., 2002. Aggregation of heterogenous beliefs and asset pricing in complete financial markets. Working paper] to a dynamic setting. We propose a method to aggregate heterogeneous individual probability beliefs, in dynamic and complete asset markets, into a single consensus probability belief. This consensus probability belief, if commonly shared by all investors, generates the same equilibrium prices as well as the same individual marginal valuation as in the original heterogeneous probability beliefs setting. As in [Calvet, L., Grandmont, J.-M., Lemaire, I., 2002. Aggregation of heterogenous beliefs and asset pricing in complete financial markets. Working paper], the construction stands on a fictitious adjustment of the market portfolio. The adjustment process reflects the aggregation bias due to the diversity of beliefs. In this setting, the construction of a representative agent is shown to be also valid.     

Why do standardized ISO 14001 environmental management systems lead to heterogeneous environmental outcomes?

Institutional theories and resource‐based views have suggested that, although they appear similar externally, standardized management systems may be implemented very differently in different organizations. This variability in implementation may be responsible for the heterogeneous performance of these standardized management systems. The current literature on the environmental impacts of ISO 14001 certification has largely neglected this phenomenon. Drawing on our survey of all US 14001 certificate holders, this study finds that great variability does exist in facilities' implementation of ISO 14001 standards. This heterogeneity has a significant impact on the linkage between ISO 14001 certification and facilities' environmental performance. In particular, we find that facilities that integrate ISO 14001 standards into their daily operations are more likely to report improvements in environmental performance. Environmental improvements are also more likely to occur in facilities that include performance management elements in their ISO 14001 standards. Furthermore, both types of facility are more likely to report that ISO certification contributes to this improvement. Neglecting the heterogeneity in facilities' implementation of ISO 14001 standards may explain the instability of findings from the empirical literature investigating the impacts of ISO 14001 certification. Theoretically, this paper informs the understanding of heterogeneous organizational behavior under isomorphic pressures. Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment.