This study estimates marginal rates of return to investment in schooling in 12 countries. Significant systematic nonlinearity in the marginal rate of return is found. In particular, the marginal rate of return is increasing significantly at low levels of education, and decreasing significantly at high levels of education. This may help explain why estimates of the return to schooling are often considerably higher when instrumenting for education.
Nonlinearity in the Return to Education
I. IntroductionThe rate of return to education has been estimated in literally hundreds of studies (see the surveys by Psacharopoulos. 1985, 1994; Ashenfelter et al., 1999; and Harmon et al. 2000). The vast majority of this work implicitly assumes that the marginal rate of return is constant over all levels of education. Some studies, however, found significant nonlinearity in the rate of return to schooling. Most of this work focused on deviations from nonlinearity at particular levels of education; that is, sheepskin effects (see, for example, Hungerford and Solon, 1987; Belman and Heywood, 1991; and Jaeger and Page, 1996). Perhaps...