Social Interactions and Schooling Decisions

The aim of this paper is to study whether a child's schooling choices are affected by the schooling choices of other children. Identification is based on a randomized targeted intervention that grants a cash subsidy conditional on school attendance to a subgroup of eligible children within small rural villages in Mexico (PROGRESA). This policy change spills over to ineligible children if social interactions are relevant. Results indicate that the eligible children tend to attend school more frequently, and the ineligible children acquire more schooling when the subsidy is introduced in their local village. Moreover, the overall effect of PROGRESA on eligible children is the sum of a direct effect due to cash transfers and an indirect effect due to changes in peer group schooling. Interestingly, the social interactions effect is almost as important as the direct effect.