Does the Rotten Child Spoil His Companion? Spatial Peer Effects Among Children in Rural India

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 construction takes the form of directed networks, whose structure allows us to identify peer effects and enables us to disentangle endogenous effects from 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. These peer effects hold even when we consider an alternative IV-based identification strategy and different variations to network size. Further, we find that the presence of peer groups helps provide insurance against the negative impact of idiosyncratic shocks to child learning.