It takes a village:the economics of parenting with neighborhood and peer effects

As children transition into adolescence, their interactions with peers progressively take on a central role in their development, while the direct influence of parents diminishes. Nonetheless, parents can retain some control by shaping their children’s peer groups. We study the interplay of parenting style and peer effects within a model where children’s skill development hinges on both parental inputs and peer interactions and where parents can mold the peer group by restricting who their children can interact with. We estimate the model and demonstrate its ability to reproduce a set of empirical patterns involving peer attributes, parental interventions, and skill accumulation among high school students in the United States. We employ the estimated model for policy simulations and find that interventions that relocate children to more favorable neighborhoods yield large positive effects. However, these effects dwindle when interventions are scaled up, owing to parents’ equilibrium responses that counteract successful assimilation into the new peer group. We propose complementary policies that can sustain the success of large-scale interventions.