Department of Quantitative Social Science Peer effects and measurement error: the impact of sampling variation in school survey data

Investigation of peer effects on achievement with sample survey data on schools may mean that only a random sample of peers is observed for each individual. This generates classical measurement error in peer variables, resulting in the estimated peer group effects in a regression model being biased towards zero under OLS model fitting. We investigate the problem using survey data for England from the Programme for International Student Assessment (PISA) linked to administrative microdata recording information for each PISA sample member’s entire year cohort. We calculate a peer group measure based on these complete data and compare its use with a variable based on peers in just the PISA sample. The estimated attenuation bias in peer effect estimates based on the PISA data alone is substantial. JEL classification: C21, C81, I21.