Educational Choice, Families, and Young People's Earnings

This paper presents two optimizing models of educational choice, discusses issues of identification, estimates earnings equations in the context of these models, and presents conditions under which we can test one against the other. The estimates indicate that education is endogenous for young people's earnings, creating a downward bias in estimated returns from education that assume exogeneity. Identification and estimation relies on family background information from a special sample from the British Household Panel Study 1991-95, which matches mothers and their young adult children. Our estimates favor a family model over an individual model, and they suggest that parents allocate resources to education to compensate for differences in their children's earnings endowments.