2.

i. Define the self-selection bias in the return to schooling when we estimate the return using an OLS model.

ii. We discussed in class methods that were used by researchers to solve the selection bias. Describe briefly how

a) the use of identical twins and

b) the use of compulsory school changes as instrumental variables may solve this problem.

iii. Suppose that Mehmet has just finished secondary school (8 years of schooling) and is considering whether to continue his education. Below is the yearly earnings he will get at each level: Years of Schooling Earnings 8 17,500 TL 9 19,350 TL 10 21,000 TL 11 22,100 TL 12 22,900 TL 13 23,000 TL When should Mehmet quit school if his discount rate is 4 percent?