On the interpretation of diploma wage effects estimated by regression discontinuity designs

Abstract

AbstractSeveral recent papers employ regression discontinuity (RD) designs to estimate the causal effect of a diploma or similar credentials on wages. I build a model of knowledge acquisition, test‐taking and labour market careers that mimics the settings studied in these papers. I show that a positive RD estimate is evidence for information frictions in the labour market, but caution that the relative importance of acquired knowledge and innate talent in the production function cannot be separately identified. While a positive RD estimate does not reveal whether students study too much or too little compared to the social optimum, the rate at which RD estimates decline with labour market experience indicates the speed of employer learning, a parameter that is critical for the extent of inefficiency in study choices.