  We investigate the returns to adolescent friendships on earnings in
adulthood. Using data from the National Longitudinal Study of Adolescent to
Adult Health, we document that individuals make investments to accumulate
friends in addition to educational investments. Because both education and
friendships are jointly determined in adolescence, OLS estimates of their
returns are biased. To estimate the causal returns to friendships, we implement
a novel procedure that assumes the returns to schooling range from 5 to 15% (as
the literature has documented), and instrument for friendships using similarity
in age among peers to obtain bounds on the returns to friendships. We find that
having one more friend in adolescence increases earnings between 7 and 14%,
which is substantially larger than the OLS estimates: measurement error and
omitted variables lead to significant downward bias.

Econometrics