On the validity of econometric techniques with weak instruments - inference on returns to education using compulsory school attendance laws

We evaluate Angrist and Krueger (1991) and Bound, Jaeger and Baker (1995) by constructing reliable confidence regions around the 2SLS and LIML estimators for returns-to-schooling regardless of the quality of the instruments. The results indicate that the returns-to-schooling were between 8 and 25 percent in 1970 and between 4 and 14 percent in 1980. Although the estimates are less accurate than previously thought, most specifications by Angrist and Krueger (1991) are informative for returns-to-schooling. In particular concern about the reliability of the model with 178 instruments is unfounded despite the low first-stage F-statistic. Finally, we briefly discuss bias-adjustment of estimators and pretesting procedures as solutions to the weak-instrument problem.