A Service of zbw A Big Fish in a Small Pond: Ability Rank and Human Capital Investment A Big Fish in a Small Pond: Ability Rank and Human Capital Investment * We would like to thank NON-TECHNICAL SUMMARY

Abstract

Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in EconStor may D I S C U S S I O N P A P E R S E R I E S IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. We study the impact of a student's ordinal rank in a high school cohort on educational attainment several years later. To identify a causal effect, we compare multiple cohorts within the same school, exploiting idiosyncratic variation in cohort composition. We find that a student's ordinal rank significantly affects educational outcomes later in life. If two students with the same ability have a different rank in their respective cohort, the higher-ranked student is significantly more likely to finish high school, attend college, and complete a 4-year college degree. These results suggest that low-ranked students under-invest in their human capital even if they have a high ability compared to most students of the same age. Exploring potential channels, we find that students with a higher rank have higher expectations about their future career, a higher perceived intelligence, and receive more support from their teachers. NON-TECHNICAL SUMMARY Parents often believe that high-ability classmates have a positive influence on their children, and potential classmates are often a decisive factor for choosing a school. In this paper, we show that having high-ability peers in school is not beneficial for everyone. A student who is surrounded by peers that are smarter than herself has a low ordinal rank within her peer group, which may come with some disadvantages. While she may benefit from studying with smarter peers, she may experience a disadvantage, for example, because teachers give more attention to higher-ranked students, or because higher-ranked students have a higher self-confidence and higher expectations about their future career. In this paper, we test whether a student's ordinal rank in a high-school cohort -being the best, second-best, third-best, and so on -affects success in high school, as well as decisions to go to college. We use data from Add Health, a large-scale survey in a representative sample of US high schools, which was administered to 90,000 students in the mid-1990s. In four subsequent waves, these students have been followed until 2008, allowing us to track students from age 16 to age 30, and to link the characteristics of a high-school cohort with educational outcomes many years later. To disentangle the effect of ordinal rank from other factors that could influence educational success -for example, school choice, absolute cognitive ability, parental background, or ethnicity -we compare students who go to the same school and who have the same absolute ability, gender, parental background, etc., but who are in different cohorts. Because not every cohort is the same -some cohorts are smarter than others -a student with the same absolute level of cognitive ability has a different ordinal rank in different cohorts. Overall, we find that a student's ordinal rank plays an important role for college choices and success in college. We find that in a cohort of 100 students a student who ranks 10 places higher than another is one percentage point more likely to go to college after high-school, and, equally, one percentage point more likely to complete a 4-year college degree. These results suggest that smart students who have a low rank because their peers are even smarter under-invest in their human capital; they choose not to go to college because of their low rank within their cohort. We also give suggestive evidence why rank matters. We find, for example, that students of higher rank have a higher perceived intelligence, and they have higher expectations about their future career. Moreover, students of a higher rank receive more support from their teachers