an article by Flávio Cunha (University of Pennsylvania) published in Fiscal Studies: the journal of applied public economics Volume 32 Issue 2 (June 2011)
Abstract
This paper summarises the literature on the estimation of production functions governing the process of skill formation. This literature focuses on attacking three problems. The first is the endogeneity of measures of investments. The second is the measurement error in skills and investments that are widely used in the literature. Endogeneity and measurement error produce, in general, inconsistent estimates. The third problem is the lack of a metric for tests designed to measure skills. The fact that scores have no cardinal meaning implies that the coefficients of the production function have no economic meaning. We show that anchoring test scores on outcomes that have a natural metric produces estimates that are economically interpretable.
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