Economics of Education Review 20 2001 201–209 www.elsevier.comlocateeconedurev
Tiebout sorting, aggregation and the estimation of peer group effects
Steven G. Rivkin
Department of Economics, Amherst College, Amherst, MA 01002-5000, USA Received 6 December 1998; accepted 9 November 1999
Abstract
Growing up in a higher socioeconomic status neighborhood and attending school with socioeconomically advantaged classmates is associated with better academic, social, and labor market outcomes. The extent to which this association
reflects a causal relationship is much debated, and the conclusions reached often depend upon the estimation method used to account for the endogeneity of school and neighborhood choice. This paper uses a sample of students from
the High School and Beyond Longitudinal Survey to examine whether the use of aggregate county and metropolitan area level data as instruments for school peer group background ameliorates the problem of endogeneity bias. The
pattern of estimates does not support the belief that aggregation reduces specification error in the estimation of peer group effects.
2001 Elsevier Science Ltd. All rights reserved.
JEL classification: I21 Keywords: Educational outcomes; Human capital
1. Introduction
The belief that higher socioeconomic background schoolmates and neighbors improves academic and
social development is widely held. Supreme Court Jus- tices emphasized the importance of peers in their ruling
that the doctrine of separate but equal did not apply to education Brown v. Board of Education, 1954. Lower
academic attainment in rural areas is attributed to chil- dren’s lack of exposure to more advanced cognitive
structures Stinchcombe, 1969. More recently, Wilson 1987 is among the many who believe that the crisis in
inner city neighborhoods results in large part from the high concentration of poor families and the disappear-
ance of stabilizing community institutions.
A great deal of empirical evidence exists to back up these beliefs, including the influential Coleman Report
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2001 Elsevier Science Ltd. All rights reserved. PII: S 0 2 7 2 - 7 7 5 7 0 0 0 0 0 3 2 - 7
Coleman et al., 1966 and more recent work by Case and Katz 1991 and Crane 1991. Yet there is some
doubt as to whether the observed association between peer characteristics and student outcomes reflects a cau-
sal relationship.
1
If families with greater resources or more commitment to schooling tend to choose communi-
ties with higher socioeconomic background residents and schools with higher socioeconomic background students,
true peer effects are easily confounded with family influences.
2
Consistent with the notion that peer group socioecon- omic background is endogenous and correlated with fam-
ily characteristics, Jencks and Mayer 1990 show that the magnitude of estimated peer effects tends to decline
as more controls for parental characteristics are included.
1
See Moffitt 1998 for a comprehensive discussion of the estimation of peer group effects.
2
See Tiebout 1956 for a discussion of the link between family preferences and neighborhood location.
202 S.G. Rivkin Economics of Education Review 20 2001 201–209
Moreover, the available variables such as family income and parental education are unlikely to account for all fac-
tors that are related to both outcomes and the choice of neighborhood and school. Consequently single equation
techniques almost certainly do not identify true peer group effects regardless of the number of included
covariates.
The problem of endogeneity bias has prompted a search for alternative methods, leading some researchers
to use data that are aggregated to the state, county, or metropolitan area level as instruments for school or
neighborhood data. They argue that aggregation reduces problems introduced by the endogeneity of school and
neighborhood choice, because school and neighborhood location decisions tend to occur within metropolitan
areas or states.
3
Yet aggregation may also exacerbate the biases that result from the omission of family, school, or
other factors that are correlated with both outcomes and peer group background. Though the theoretical effects of
aggregation on specification error are ambiguous, empirical evidence suggests that aggregation increases
rather than reduces omitted variables bias in the esti- mation of school resource effects, a closely related
topic.
4
In an influential recent paper, Evans, Oates, and Schwab 1992 use aggregate metropolitan area charac-
teristics to identify the effects of school peer group back- ground on teen pregnancy and high school drop out rates.
In sharp contrast to the single equation estimates, they find that there is no significant relationship between out-
comes and peer socioeconomic background once metro- politan area characteristics are used as instruments for
the school peer group measure. This pattern of results is consistent with the hypothesis that much if not all of the
observed relationship between outcomes and peer group variables results from the effects of unobserved family
influences.
However, the findings of Evans et al. 1992 do not provide convincing evidence that aggregation reduces
specification error. First, because the coefficient esti- mates are quite noisy, they are also consistent with posi-
tive and sizeable peer group effects. Second, the statisti- cal evidence offered in support of the validity of the
instruments is uninformative. Finally, the theoretical jus- tification for the methodology is not compelling because
of the aforementioned ambiguous effect of aggregation on omitted variables bias. Given the lack of both clear
3
See Card and Krueger 1996 for a discussion of the advan- tages of aggregate data in the estimation of school resource
effects.
4
See Grogger 1996 and Hanushek, Rivkin, and Taylor 1996 and for evidence on school resource effects, and Moffit
1995 for a general discussion of aggregation and specifi- cation error.
theoretical support for the methodology and statistical evidence of instrument validity, much stronger empirical
evidence is needed in order to evaluate the desirability of using aggregate data to identify peer group effects.
This paper provides additional evidence on peer group effects using a sample of non-Hispanic Black and White
women from the sophomore cohort of the High School and Beyond Longitudinal Survey HSB, US Department
of Education, 1986. Outcomes include standardized test scores, teen fertility, high school continuation, and non-
participation in either school or work following high school graduation. The HSB contains many advantages
over other data sets such as the NLSY used in the investigation of peer group effects, in particular the large
number of students sampled in each school and the avail- ability of test score data early in the high school career
that can be used to control for pre-existing differences in student achievement.
The empirical analysis focusses on the hypothesis that the use of aggregate information as instruments reduces
the magnitude of specification error. In contrast to the findings of Evans, Oates, and Schwab, the majority of
instrumental variable estimates are larger than the single equation estimates, and a number are statistically sig-
nificant at conventional levels. This pattern is consistent with prior evidence that aggregation tends to exacerbate
specification error in the estimation of education pro- duction functions, and it raises serious doubts about the
use of aggregate data as a way to identify peer group, school, or neighborhood effects of any kind.
2. Data
