Ability biases in schooling returns and twins: a test and new estimates

Identical twins have been used to control for "ability" in efforts to obtain unbiased estimates of the earnings impact of schooling and of biases in estimates that do not control for earnings endowments. This study (1) presents new estimates of schooling returns and of "ability" bias using a new twins sample, (2) develops and applies a test of the significance of that bias, and (3) demonstrates that there may be "ability" bias even if the genetically-endowed component of ability does not affect schooling decisions directly if this component of ability is correlated with other family characteristics such as income that do affect schooling. It is thus not possible to identify the separate contributions of family constraints and individual ability to "ability" bias. The basic empirical result is that, net of measurement error, upward "ability" bias is statistically significant in OLS estimates, causing an overestimate of the schooling impact of 12%. [ JEL 121, J24] (C) 1999 Elsevier Science Ltd. All rights reserved.