This paper re-examines a well-established hypothesis postulating that life expectancy augments incentives for human capital accumulation, leading to global income differences. A major distinguishing feature of the current study is to estimate heterogeneous panel data models under a common factor framework, which explicitly accounts for parameter heterogeneity, unobserved common factors (UCFs), and variables' non-stationarity. In sharp contrast to most previous studies, I find that the impact of health improvements on human capital accumulation turns out to be imprecisely estimated at conventionally accepted levels of statistical significance. I demonstrate that conventional estimates of the educational returns to rising longevity are derived from estimating misspecified models at least partially due to parameter heterogeneity and the presence of UCFs.
Keywords: cross-sectional dependence; human capital; life expectancy; misspecification; parameter heterogeneity.
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