Accounting for heterogeneous returns in sequential schooling decisions

This paper presents a method for estimating returns to multiple schooling levels taking into account that returns may be heterogeneous among agents and that educational decisions are made sequentially. A sequential decision model explicitly considers that the level of education is the result of previous schooling choices and so, the variation of supply-side instruments over time will emerge as a source of identification of the desired parameters. A test for heterogeneity in returns from sequential schooling decisions is developed and expressions for Marginal Treatment Effects are obtained in this context. Returns are estimated and tested from cross-sectional data from a Spanish household survey that contains rich family background information and useful instruments. This methodology is used to analyze possible effects of the 1970 reform of the Spanish education system. (C) 2009 Elsevier B.V. All rights reserved.