ECONOMETRICS: Flexible estimation of skill formation models; Professor Joachim Freyberger (University of Bonn)

Abstract:

This paper examines estimation of skill formation models, a critical component in understanding human capital development and its effects on individual outcomes. Existing estimators are either based on moment conditions and only applicable in specific settings or rely on distributional approximations that typically do not align with the model. Our method employs an iterative likelihood-based procedure, which flexibly estimates latent variable distributions and recursively incorporates model restrictions across time periods. This approach reduces computational complexity while accommodating nonlinear production functions and measurement systems. Inference can be based on a bootstrap procedure that does not require re-estimating the model for bootstrap samples. Monte Carlo simulations and an empirical application demonstrate that our estimator outperforms existing methods, whose estimators are often substantially biased or noisy.