In this article, we provide quantitative evidence on the effects of monetary incentive schemes designed to reduce racial differences in school attainment and earnings. Our analysis is based on the structural estimation of a dynamic model of schooling, work, and occupational choice decisions over the life cycle. We consider two recent proposals that, although not specifically targeted to blacks, can be expected to have differential racial impacts. One proposal, suggested by Robert Reich, provides a high school graduation bonus to youths from lower‐income families. The other, suggested by Edmund Phelps, provides wage subsidies to low‐wage workers.

The recent literature exploiting natural events as “natural experiment” instruments is reviewed to assess to what extent it has advanced empirical knowledge. A weakness of the studies that adopt this approach is that the necessary set of behavioral, market, and technological assumptions made by the authors in justifying their interpretations of the estimates is often absent. The methodology and findings from twenty studies are summarized and simple economic models are used to elucidate the implicit assumptions made by the authors and to demonstrate the sensitivity of the interpretations of the findings to the relaxation of some of these assumptions.