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The Long-Term Spillover Effects of Changes in the Return to Schooling

Apr 2018
SCID Working Paper
By  Ran Abramitzky, Victor Lavy, Santiago Perez
We study the short and long-term spillover effects of a pay reform that substantially increased the returns to
schooling in Israeli kibbutzim. This pay reform, which induced kibbutz students to improve their academic
achievements during high school, spilled over to non-kibbutz members who attended schools with these
kibbutz students. In the short run, peers of kibbutz students improved their high school outcomes and shifted
to courses with higher financial returns. In the medium and long run, peers completed more years of postsecondary
schooling and increased their earnings. We discuss three main spillover channels: diversion of
teachers’ instruction time towards peers, peer effects from improved schooling performance of kibbutz
students, and the transmission of information about the returns to schooling. While each of these channels
likely contributed to improving the outcomes of peers, we provide suggestive evidence that the estimates are
more consistent with the effects operating mainly through transmission of information.