Ranking Rates of Return to Education: Legitimacy and an Explicit Diagnostic

Rankings of internal rates of return to education have significantly influenced education expenditures within developing countries and lending priorities of multilateral institutions. It is widely suspected, however, that estimated education returns are subject to systematic bias. The direction and magnitude of this bias are hotly contested. This paper demonstrates that in the presence of systematic bias, idiosyncratic properties of the internal-rate-of-return mapping may cause a ranking reversal. An explicit analytical test of return-ranking legitimacy is developed and applied to select African and Asian countries.