Paper # Author Title
A recent literature has developed that combines two prominent empirical approaches to ex ante policy evaluation: randomized controlled trials (RCT) and structural estimation. The RCT provides a “gold-standard" estimate of a particular treatment, but only of that treatment. Structural estimation provides the capability to extrapolate beyond the experimental treatment, but is based on untestable assumptions and is subject to structural data mining. Combining the approaches by holding out from the structural estimation exercise either the treatment or control sample allows for external validation of the underlying behavioral model. Although intuitively appealing, this holdout methodology is not well grounded. For instance, it is easy to show that it is suboptimal from a Bayesian perspective. Using a stylized representation of a randomized controlled trial, we provide a formal rationale for the use of a holdout sample in an environment in which data mining poses an impediment to the implementation of the ideal Bayesian analysis and a numerical illustration of the potential benefits of holdout samples. Download Paper
This paper evaluates the impact of three different performance incentives schemes using data from a social experiment that randomized 88 Mexican high schools with over 40,000 students into three treatment groups and a control group. Treatment one provides individual incentives for performance on curriculum-based mathematics tests to students only, treatment two to teachers only and treatment three gives both individual and group incentives to students, teachers and school administrators. Program impact estimates reveal the largest average effects for treatment three, smaller impacts for treatment one and no impact for treatment two. Download Paper
This paper discusses the use of discrete choice dynamic programming (DCDP) methods for evaluating policies of particular relevance to developing countries, such as policies to reduce child labor and increase school attendance, to improve school quality, to affect immigration flows, to expand old age pension benefits, or to foster small business investment through microfinance. We describe the DCDP framework and how it relates to static models, illustrate its application with an example related to conditional cash transfer programs, consider numerous empirical applications from the literature of how the DCDP methodology has been used to address substantively important policy issues, and discuss methods for model validation. Download Paper
In this paper, we study the relationship among schooling, youth employment and youth crime. The framework, a multinomial discrete choice vector autoregression, provides a comprehensive analysis of the dynamic interactions among a youth's schooling, work and crime decisions and arrest and incarceration outcomes. We allow for observable initial conditions, unobserved heterogeneity, measurement error and missing data. We use data from the NLSY97 on black male youths starting from age 14. The estimates indicate important roles both for heterogeneity in initial conditions and for stochastic events that arise during one's youth in determining outcomes as young adults. Download Paper
In this paper, we propose a new approach to the empirical study of the relationships among schooling, youth employment and youth crime which provides a comprehensive analysis of the dynamic interactions among these choices and exposure to the criminal justice system. The empirical framework takes the form of a multinomial discrete choice vector autoregression of a youth’s schooling, work and crime decisions as well as arrest and incarceration outcomes. We allow for observable initial conditions, unobserved heterogeneity, the possibility of measurement error and for missing data. We use data from the NLSY97 on black male youths starting from age 14. The estimates indicate an important role for heterogeneity in initial conditions. We also find that stochastic events that arise during one’s youth can be important in determining outcomes as young adults. Download Paper
This paper discusses methods for evaluating the impacts of social programs prior to their implementation. Ex ante evaluation is useful for designing programs that achieve some optimality criteria, such as maximizing impact for a given cost. This paper illustrates through several examples the use of behavioral models in predicting the impacts of hypothetical programs. Among the programs considered are wage subsidy programs, conditional cash transfer programs, and income support programs. In some cases, the behavioral model justifies a completely nonparametric estimation strategy, even when there is no direct variation in the policy instrument. In other cases, stronger modeling and/or functional form assumptions are required to evaluate a program ex ante. We illustrate the application of ex ante evaluation methods using data from the PROGRESA school subsidy experiment in Mexico. We assess the effectiveness of the method by comparing ex ante predictions of program impacts to the impacts measured under the randomized experiment. Download Paper
Opportunities for external validation of behavioral models in the social sciences that are based on randomized social experiments or on large regime shifts, that can be treated as experiments for the purpose of model validation, are extremely rare. In this paper, we consider an alternative approach, namely mimicking the essential element of regime change by non-randomly holding out from estimation a portion of the sample that faces a significantly different policy regime. The non-random holdout sample is used for model validation/selection. We illustrate the non-random holdout sample approach to model validation in the context of a model of welfare program participation. The policy heterogeneity that we exploit to generate a non-random holdout sample takes advantage of the wide variation across states that has existed in welfare policy. Download Paper
In this paper, we present a unified treatment of and explanation for the evolution of wages and employment in the U.S. over the last 30 years. Specifically, we account for the pattern of changes in wage inequality, for the increased relative wage and employment of women, for the emergence of the college wage premium and for the shift in employment from the goods to the service-producing sector. The underlying theory we adopt is neoclassical, a two-sector competitive labor market economy in which the supply of and demand for labor of heterogeneous skill determines spot market skill-rental prices. The empirical approach is structural. The model embeds many of the features that have been posited in the literature to have contributed to the changing U.S. wage and employment structure including skill-biased technical change, capital-skill complementarity, changes in relative product-market prices, changes in the productivity of labor in home production and demographics such as changing cohort size and fertility Download Paper
Using data from the NLSY79, we structurally estimate a dynamic model of the life cycle decisions of young women. The women make joint and sequential decisions about school attendance, work, marriage, fertility and welfare participation. We use the model to perform a set of counterfactual simulations designed to shed light on three questions: (1) How much of observed minority-majority differences in behavior can be attributed to differences in labor market opportunities, marriage market opportunities, and preference heterogeneity? (2) How does the welfare system interact with these factors to augment those differences? (3) How can new cohorts that grow up under the new welfare system (TANF) be expected to behave compared to older cohorts? Download Paper
In this paper, we develop and estimate a model of retirement and savings incorporating limited borrowing, stochastic wage offers, health status and survival, social security benefits, Medicare and employer provided health insurance coverage, and intentional bequests. The model is estimated on sample of relatively poor households from the first three waves of the Health and Retirement Study (HRS), for whom we would expect social security income to be of particular importance. The estimated model is used to simulate the responses to several counterfactual experiments corresponding to changes in social security rules. These include changes in benefit levels, in the payroll tax, in the social security earnings tax and in early and normal retirement ages. Download Paper
One of the most striking changes in the U.S. economy over the past 50 years has been the growth in the service sector. In 1950, 57 percent of workers were employed in the service sector, by 1970 that figure had risen to 63 percent and by 2000 to 75 percent. While service sector employment grew by 2.2 percent per year faster than employment in the goods sector between 1968 and 2000, the real hourly wage in the service sector grew only by 0.23 percent more per year over the same period. In this paper, we assess whether or not the essential constancy of the relative wage implies that individuals face small costs of switching sectors and quantify the relative importance of labor supply and demand factors in the growth of the service sector. We specify and estimate a two-sector growth model with idiosyncratic and aggregate shocks that allows us to address these empirical issues in a unified coherent framework. Our estimates imply that there are large mobility costs; output in both sectors would have been double their current levels if these mobility costs had been zero. In addition, we find that demand side factors, that is, technical change and movements in product and capital prices, were responsible for the growth of the service sector. Download Paper
This paper studies the determinants of children's scores on tests of cognitive achievement in math and reading. Using rich longitudinal data on test scores, home environments, and schools, we implement alternative specifications for the production function for achievement and test their assumptions. We do not find support for commonly used restrictive models that assume test scores depend only on contemporaneous inputs or that assume conditioning in a lagged score captures the effects of all past inputs. Instead, the results show that both contemporaneous and lagged inputs matter in the production of current achievement and that it is important to allow for unobserved child-specific endowment effects and endogeneity of inputs. Using a specification that incorporates these features, we analyze sources of test score gaps between black, white and Hispanic children. The estimated model captures key patterns in the data, such as the widening of minority-white test score gaps with age, which is most pronounced for black children. The parameter estimates indicate that home inputs are significant determinants of achievement, while the effects of school inputs (as measured by pupil-teacher ratios and teacher salaries) are imprecisely measured in specifications that allow for unobserved child endowments. We find that equalizing home inputs at the average levels of white children would close the black-white test score gap by about 25% and close the Hispanic-white gap by about 30%. Download Paper
This paper studies the performance of a methodology that can be used to evaluate the impact of new policies that radically depart from existing ones. It uses data gathered from a randomized schooling subsidy experiment in Mexico (i) to estimate and validate a dynamic behavioral model of parental decisions about fertility and child schooling, (ii) to forecast long-term program impacts that extend beyond the life of the experiment, and (iii) to assess the impact of a variety of counterfactual policies. The behavioral model is estimated using data on families in the randomized-out control group and in the treatment group prior to the experiment, both of which did not receive any subsidy. Child wages provide a valuable source of variation in the data for identifying subsidy effects. Using the estimated model, we predict the effects of school subsidies according to the schedule that was implemented under the Mexican PROGRESA program. We compare the predicted impacts to the experimental benchmarks and find that the model's predictions track the experimental results closely. The model is also used to simulate the effects of counterfactual programs and to find an alternative subsidy schedule that provides greater impact on schooling achievement at similar cost to the existing program. Download Paper
In this paper, we provide estimates of welfare benefit effects on a set of behaviors that includes welfare participation, fertility, marriage, work and schooling using approximations to the decision rules that would be derived from an explicit dynamic optimization problem. The estimates are based on data from the 1979 youth cohort of the National Longitudinal Surveys of Labor Market Experience (NLSY79). Download Paper
There is an extensive literature in economics that seeks to determine the quantitative impact of welfare benefits on female labor supply and the propensity of women to participate in the welfare system. A growing literature also examines the impact of welfare generosity on fertility and marriage - behaviors that influence welfare eligibility and the level of benefits. Most of the studies adopt a static choice framework, albeit not always explicitly, to motivate their empirical specifications. However, the behaviors that are presumably affected by the welfare system (fertility, marriage, work, school) clearly have both immediate and long-term consequences. If potential welfare recipients are forward-looking, they will consider these long term consequences when making current decisions. In this paper, we investigate the implications of the existence of forward-looking behavior for empirical work that seeks to determine the effect of welfare benefits on behavior. Download Paper
A strong positive association between one's school attainment and that of one's parents has been consistently documented in numerous empirical studies. The underlying cause of this intergenerational correlation has been the subject of contentious debate in the social sciences for many years. Two competing types of explanations are prominent. The first is based on the heritability of traits, that is, that children of more educated parents may inherit the abilities, personalities and preferences that led to the higher educational achievement of their parents. The second type of explanation is based on human capital production, namely that more educated parents, due to their own preferences for more educated children and/or due to their higher wealth, may invest more heavily in their children's human capital. Download Paper
One of the most widely estimated regression equations in economics is that of the earnings or wage function, which relates a measure of market remuneration (e.g., hourly wage rates, annual earnings) to measures of human capital stocks such as completed schooling and market work experience. In the first half of this paper, I address two related questions: (1) What interpretation should be given to the wage equation? and (2) Why should we care about estimating it? The second half of the paper is devoted to the consideration of education policies, such as changes in college tuition costs, in which the estimation and interpretation of wage equations play important roles. Download Paper
A fundamental premise of Federal and State legislation that restricts the hours that minors can be employed while school is in session is that working may adversely affect school performance. In this paper, we develop and structurally estimate a sequential of high school attendance and work decicions. Policy experiments based on the models estimates indicate that even the most restrictive prohibition would have only a limited impact on the high school graduation rates of with males. Download Paper