Group-Average Observables as Controls for Sorting on Unobservables When Estimating Group Treatment Effects: the Case of School and Neighborhood Effects
We consider the classic problem of estimating group treatment effects when individuals sort based on observed and unobserved characteristics that affect the outcome. Using a standard choice model, we show that controlling for group averages of observed individual characteristics potentially absorbs all the across-group variation in unobservable individual characteristics. We use this insight to bound the treatment effect variance of school systems and associated neighborhoods for various outcomes. Across four datasets, our most conservative estimates indicate that a 90th versus 10th percentile school system increases the high school graduation probability by between 0.047 and 0.085 and increases the college enrollment probability by between 0.11 and 0.13. We also find large effects on adult earnings. We discuss a number of other applications of our methodology, including measurement of teacher value-added.
We thank Steven Berry, Greg Duncan, Phil Haile, Hidehiko Ichimura, Amanda Kowalski, Costas Meghir, Richard Murnane, Douglas Staiger, Jonathan Skinner, Shintaro Yamiguchi and as well as seminar participants at Cornell University, Dartmouth College, Duke University, the Federal Reserve Bank of Cleveland, McMaster University, the NBER Economics of Education Conference, Yale University, Paris School of Economics, University of Colorado-Denver, and the University of Western Ontario for helpful comments and discussions. This research uses data from the National Center for Education Statistics as well as from North Carolina Education Research Data Center at Duke University. We acknowledge both the U.S. Department of Education and the North Carolina Department of Public Instruction for collecting and providing this information. We would also thank the Russell Sage Foundation and the Yale Economics Growth Center for financial support. A portion of this research was conducted while Altonji was a visitor at the LEAP Center and the Department of Economics, Harvard University The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.