Abstract
Estimating the effect of ‘ethnic capital’ on human capital investment decisions is complicated by the endogeneity of location choice of immigrants and the reflection problem. We exploit a rare immigrant settlement policy in Germany to identify the causal impact of parental peer-heterogeneity on the educational outcomes of their children. To identify the direction of peer effect we restrict to no-child-adult-peers who completed their education much before the children in our sample of interest. We find that children of low-educated parents benefit significantly from the presence of high-educated neighbors, with more pronounced effects in more polarized neighborhoods and significant gender heterogeneity. In contrast, we do not find any negative influence coming from the low-educated neighbors. Our estimates are robust to a range of flexible peer definitions. Overall, the findings suggest an increase in parental aspirations as the possible mechanism rather than a direct child-to-child peer effect.
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