Are Education and Entrepreneurial Income Endogenous and Do Family Background Variables Make Sense as Instruments?: A Bayesian Analysis

Joern Block, Lennart F. Hoogerheide and Roy Thurik

No 329, SOEPpapers on Multidisciplinary Panel Data Research from DIW Berlin, The German Socio-Economic Panel (SOEP)

Abstract: Education is a well-known driver of (entrepreneurial) income. The measurement of its influence, however, suffers from endogeneity suspicion. For instance, ability and occupational choice are mentioned as driving both the level of (entrepreneurial) income and of education. Using instrumental variables can provide a way out. However, three questions remain: whether endogeneity is really present, whether it matters and whether the selected instruments make sense. Using Bayesian methods, we find that the relationship between education and entrepreneurial income is indeed endogenous and that the impact of endogeneity on the estimated relationship between education and income is sizeable. We do so using family background variables and show that relaxing the strict validity assumption of these instruments does not lead to strongly different results. This is an important finding because family background variables are generally strongly correlated with education and are available in most datasets. Our approach is applicable beyond the field of returns to education for income. It applies wherever endogeneity suspicion arises and the three questions become relevant.

Keywords: Education; income; entrepreneurship; self-employment; endogeneity; instrumental variables; Bayesian analysis; family background variables (search for similar items in EconPapers)
JEL-codes: C11 J24 L26 M13 (search for similar items in EconPapers)
Pages: 27 p.
Date: 2010
New Economics Papers: this item is included in nep-edu, nep-ent and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Are Education and Entrepreneurial Income Endogenous and do Family Background Variables make Sense as Instruments? A Bayesian Analysis (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwsop:diw_sp329

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