How Much of Observed Economic Mobility is Measurement Error? IV Methods to Reduce Measurement Error Bias, with an Application to Vietnam

Abstract

Research on economic growth and inequality inevitably raise issues concerning economic mobility because the relationship between long-run inequality and short-run inequality is mediated by income mobility; for a given level of short-run inequality greater mobility implies lower long-run inequality. Yet empirical measures of both inequality and mobility are biased upward due to measurement error in income and expenditure data collected from household surveys. This paper presents a straightforward method to remove this bias using instrumental variable estimates. The method is applied to panel data from Vietnam. The results imply that at least 15%, and perhaps as much as 42%, of measured mobility is upward bias due to measurement error. The results also suggest that measurement error accounts for at least 12% of measured inequality.