Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 02/11: What Linear Estimators Miss: The E ects of Family Income on Child Outcomes

Katrine Vellesen Løken (), Magne Mogstad () and Matthew Wiswall ()
Additional contact information
Katrine Vellesen Løken: University of Bergen, Postal: Department of Economics, Fosswinckelsgate 14, 5007 Bergen, Norway
Magne Mogstad: Statistics Norway, Postal: Statistics, Postboks 8131 Dep, 0033 Oslo, Norway
Matthew Wiswall: New York University, Postal: Economics Department , Department of Economics, New York University , 19 W. 4th Street, 6FL , New York, NY 10012 ,

Abstract: This paper examines the causal relationship between family income and child out- comes. Motivated by theoretical predictions and OLS results suggesting a nonlinear relationship, we depart from previous studies in allowing the marginal e ects on children's outcomes of an increase in family income to vary across the income dis- tribution. Our nonlinear IV and xed-e ect estimates show an increasing, concave relationship between family income and children's outcomes. By decomposing the linear estimators, we show that the linear estimates miss the e ects of family in-come, because they assign little weight to the large marginal e ects in the lower part of the income distribution.

Keywords: family income; child development; nonlinearities; fixed effects estimation; instrumental variables estimation; linear models

JEL-codes: C21; C23; J13

53 pages, January 14, 2011

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