Abstract:

The first chapter examines the properties of instrumental variables applied to models with essential heterogeneity, that is, models where responses to interventions are heterogeneous and agents adopt treatments with at least partial knowledge of their idiosyncratic response. We analyze two-outcome and multiple-outcome models including ordered and unordered choice models. We develop a simple test for the presence of essential heterogeneity. We note the asymmetry of the model of essential heterogeneity: outcomes of choices are heterogeneous in a general way; choices are not. When both choices and outcomes are permitted to be symmetrically heterogeneous, the method of IV breaks down for estimating treatment parameters.

The second chapter presents a model of unobserved heterogeneity in which the unobserved components of the model are linked to individual's abilities. More precisely, this chapter establishes that a low dimensional vector of cognitive and noncognitive skills explains a variety of labor market and behavioral outcomes. Our analysis addresses the problems of measurement error, imperfect proxies, and reverse causality that plague conventional studies. Noncognitive skills strongly influence schooling decisions, and also affect wages given schooling decisions. Schooling, employment, work experience and choice of occupation are affected by latent noncognitive and cognitive skills. We show that the same latent skills also determine a wide variety of risky behaviors.

The third chapter extends the results presented in the second chapter. It studies the relationship between abilities, schooling choices and black-white differentials in labor market outcomes. The empirical analysis is based on a model of endogenous schooling choices and labor market outcomes with two unobserved sources of heterogeneity (abilities), one unobserved source of uncertainty and four time periods. In the model, agents' schooling decisions are based on expected future earnings, family background and unobserved abilities. Hourly wages and annual hours worked are modeled for each period. The results indicate that, even after controlling for abilities, there are significant racial labor market gaps in the overall population and within schooling levels. The results also suggest that the standard practice of equating observed test scores may overcompensate for differentials in ability, underestimating unexplained racial gaps.*

*This dissertation is a compound document (contains both a paper copy and a CD as part of the dissertation). The CD requires the following system requirements: Adobe Acrobat.