School system evaluation by value added analysis under endogeneity

Value added is a common tool in educational research on effectiveness. It is often modeled as a (prediction of a) random effect in a specific hierarchical linear model. This paper shows that this modeling strategy is not valid when endogeneity is present. Endogeneity stems, for instance, from a correlation between the random effect in the hierarchical model and some of its covariates. This paper shows that this phenomenon is far from exceptional and can even be a generic problem when the covariates contain the prior score attainments, a typical situation in value added modeling. Starting from a general, model-free definition of value added, the paper derives an explicit expression of the value added in an endogeneous hierarchical linear Gaussian model. Inference on value added is proposed using an instrumental variable approach. The impact of endogeneity on the value added and the estimated value added is calculated accurately. This is also illustrated on a large data set of individual scores of about 200,000 students in Chile.