Reconsidering the Mechanisms of Peer Achievement Spillovers: Implications for Identification and Policy∗

The literature largely recognizes a role for peer achievement spillovers in educational production, though the theory behind this is not always clear. I compare two theories for why peer achievement may affect an individual’s achievement, as a proxy for unobserved peer ability or effort. While the literature does not tend to distinguish between these mechanisms, I show that the implications for identification are quite different. In fact, I argue that the evidence for contemporaneous effort-type spillovers is compelling and that the tendency to focus only on spillovers from predetermined characteristics of students may be misguided. The model also helps to clarify the interpretation of spillovers from peer characteristics. I show that the marginal effect of peer characteristics may actually differ in sign depending on the underlying mechanism of peer influence. Finally, I discuss the relevance of these results for policy, particularly focusing on optimal grouping. ∗I would like to thank Buz Brock, Steven Durlauf, Han Hong, Jack Porter and Karl Scholz for helpful discussions and comments. I would also like to thank Caleb White for excellent research assistance. All errors are my own. †Department of Economics, University of Wisconsin-Madison, Madison, WI 53706; [email protected].