This paper identiﬁes the effect of neighborhood peer groups on childhood skill acquisition using observational data. We incorporate spatial peer interaction, deﬁned as a child’s nearest geographical neighbors, into a production function of child cognitive development in Andhra Pradesh, India. Our peer group deﬁnition takes the form of networks, whose structure allows us to separately identify endogenous peer effects and contextual effects. We exploit variation over time to avoid confounding correlated with social effects. Our results suggest that spatial peer and neighborhood effects are strongly positively associated with a child’s cognitive skill formation. Further, we ﬁnd that the presence of peer groups helps provide insurance against the negative impact of idiosyncratic shocks to child learning. We show that peer effects are robust to different speciﬁcations of peer interactions and investigate the sensitivity of our estimates to potential mis-speciﬁcation of the network structure using Monte Carlo experiments
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