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American Economic Journal: Applied Economics: Vol. 4 No. 2 (April 2012)

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What Linear Estimators Miss: The Effects of Family Income on Child Outcomes

Article Citation

Løken, Katrine V., Magne Mogstad, and Matthew Wiswall. 2012. "What Linear Estimators Miss: The Effects of Family Income on Child Outcomes." American Economic Journal: Applied Economics, 4(2): 1-35.

DOI: 10.1257/app.4.2.1

Abstract

We assess the implications of nonlinearity for IV and FE estimation when the estimated model is inappropriately assumed to be linear. Our application is the causal link between family income and child outcomes. Our nonlinear IV and FE estimates show an increasing, concave relationship between family income and children's outcomes. We find that the linear estimators miss the significant effects of family income because they assign little weight to the large marginal effects in the lower part of the income distribution. We also show that the linear IV and FE estimates differ primarily because of different weighting of marginal effects. (JEL C26, D14, J12, J13)

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Authors

Løken, Katrine V. (U Bergen)
Mogstad, Magne (U College London)
Wiswall, Matthew (NYU)

JEL Classifications

C26: Single Equation Models: Single Variables: Instrumental Variables (IV) Estimation
D14: Personal Finance
J12: Marriage; Marital Dissolution; Family Structure; Domestic Abuse
J13: Fertility; Family Planning; Child Care; Children; Youth

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