Economists think people make important choices such as those related to schooling by comparing anticipated costs with expected benefits. The cost of staying in secondary school is determined partly by compulsory schooling laws, which punish those who leave school too soon. Since you avoid punishment by staying in school, compulsory schooling laws make extra schooling seem cheaper relative to the alternative, dropping out. This generates a causal chain reaction leading from compulsory schooling laws to schooling choices to earnings that might reveal the economic returns to schooling. The ’metrics methods behind this idea are those of Chapters 3 and 5: instrumental variables and dif f erences-indif f erences.
As always, IV begins with the first stage...Read More