Educational Investment Responses to Economic Opportunity: Evidence from Indian Road Construction

Abstract

The long run outcomes of the rural poor in developing countries are likely to depend on increased schooling, but new economic opportunities have theoretically ambiguous impacts on human capital investment. We examine the impact of increased access to markets on educational choices, focusing on India's flagship road construction program, under which 120,000 new roads were built between 2001 and 2014. We apply a panel fixed effects model and a regression discontinuity model, using rural census data on school enrollment, and administrative road program data. We find precise positive impacts of new roads on school enrollment. Children not only stay in school longer, but score higher and increasingly pass school completion exams. Effects are concentrated where the urban-rural wage gap is small, and close to zero where the wage gap is highest, indicating that the opportunity cost of school remains important. Effects are largest in the poorest villages, suggesting important liquidity effects. Income and return effects thus appear to dominate substitution effects in all but the most remunerative external labor markets. Our estimates are similar across all regions of India, and reflect the impacts of new market connections in places unlikely to have direct connections to major export markets.