Proceedings of the German Development Economics Conference, Berlin 2011 40
This paper identifies the effect of neighborhood peer groups on childhood skill acquisition using observational data. We incorporate spatial peer interaction, defined as a child's nearest geographical neighbors, into a production function of child cognitive development in Andhra Pradesh, India. Our peer group definition takes the form of networks, whose structure allows us to separately identify endogenous peer effects and contextual effects. We exploit variation over time to avoid confounding correlated with social effects. Our results suggest that spatial peer and neighborhood effects are strongly positively associated with a child's cognitive skill formation. Further, we find that the presence of peer groups helps provide insurance against the negative impact of idiosyncratic shocks to child learning. We show that peer effects are robust to different specifications of peer interactions and investigate the sensitivity of our estimates to potential mis-specification of the network structure using Monte Carlo experiments.