Estimating Returns to Education of Chinese Residents: Evidence from Optimal Model Selection

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This paper estimated returns to education of Chinese residents using the optimal instrumental variables selection method based on simulated annealing algorithm. First, we introduced 38 excluded instrumental variables as the possible endogenous explanatory variable of years of education based on the rules of instrumental variables in current literature and then to get a two- stage least-squares (2SLS) regression with those variables. With this regression, we found out that there are weak instruments in the model. Then, based on simulated annealing algorithm, we chose spouses’ education years (edus) as the most appropriate instrumental variable and others as redundant instruments and weak instruments. Furthermore, a heteroscedasticity test was conducted on the regression residual of the structural equation and got a heteroscedastic result among disturbance terms. After applying generalized method of moments (GMM) and a series of model specification tests, we finally got six exact excluded instrumental variables. Last but not least, after the final GMM estimation based on the selected optimal instrumental variables, the conclusion of this paper was that the returns to education of Chinese residents are 9.96%.