Intra and inter-household externalities in children's schooling: evidence from rural residential neighborhoods in Bangladesh

Abstract

This paper tests for neighborhood effects on children’s schooling, using unique data on rural residential neighbourhoods from Bangladesh. We find that school completion of children is positively and significantly affected by the mean grade completion of other children in the neighbourhood. We then present three pieces of evidence that suggest that the social effect offers a valid explanation. Firstly, the evidence we find of inter-household externalities is not driven out by control for a host of neighborhood and household attributes. Secondly, the result remains robust to neighbourhood composition effects: it is unchanged as we purge our main sample of the households within the neighbourhood that are potentially linked in terms of their recent history of partition. Thirdly, a similar peer effect is found for adults who completed schooling before the introduction of existing educational reforms in rural areas suggesting that the observed effect of growing up in educated neighbourhood does not merely capture the influence of common exposure to various government educational interventions. As a by-product, the paper also provides evidence of intra-household externality in children’s schooling, net of neighborhood externalities. We conclude by discussing the implication of these findings for education policy design.