Rates of Return to Four-Year University Education: An Application of Regression Discontinuity Design

It is invariably difficult to estimate the rate of return to university education, because of the problem of omitted variable bias. Using a regression discontinuity design, we estimate the effect of a four-year university education on earnings, and we explore the pathways through which the effect operates. Our estimation exploits the centralized, score-based college/university admission system in China, where the minimum scores required for university admission are externally determined by the provincial governments. Our findings suggest that being eligible for four-year university admission implies a sizable increase in earnings. The payoff can be attributed to the prolonged length of education and improvements in education quality, although the quality effects cannot be precisely estimated.