Since the launch of the voucher system with free school choice in Sweden in the early 1990s, individual students were offered opportunities to attend schools of their own preferences. Even though a claimed intention of the free school choice was to reduce the educational inequality with respect to achievement differences and social background of students, empirical evidence has shown that the social background effect on academic achievement has been strengthened between different schools (Gustafsson & Yang Hansen, 2009).

One of the key factors behind the strengthened educational inequality is believed to be peer effects. Education policy changes, such as free school choice, often make substantial changes to the composition of a student's peer group, especially when such a policy is mostly taken advantage of by the well-educated middle class parents (Levin, 2002). It may be expected that the learning outcomes may be affected by the school/classroom mix. When students in schools or class are sorted by social, ethnic background and or prior achievement, both students’ cognitive and non-cognitive outcomes will be affected by the characteristics of their peers (Hanushek et al., 2003, Hoxby, 2000, Marsh et al., 2008).

Other school organizational factors, such as tracking and ability grouping also affect the composition of students in classrooms or schools. Informal ability grouping for instruction, however, has become more common in the recent years in Sweden (Mullis et al., 2012). Ammermüller & Pischke (2009) studied peer effects in six European countries using IES PIRLS 2001 data. Although the average peer effect estimated for Sweden was rather similar to those in the rest of the countries, they did find evidence that students in the Swedish sample may not have been randomly assigned to their classes.

Though research has demonstrated the importance of peer effects, the estimated size, however, was rather small. This is partly due to the methodological challenges in estimating peer effect, since the composition of students in schools and classrooms are very often not randomly formed. The endogeneity hence will bias the estimation of peer effects. One of the commonly used approaches is using the within-school variance to identify peer effect in a school fixed effect model. However, this approach assumes that the students in the classroom are randomly assigned because if student’s characteristics in the classrooms are related to the unmeasured components in the model, the estimation of variance between classrooms does not represent the peer characteristics.

However, Hoxby (2000) demonstrated that such selection biases can be tackled by analyzing adjacent cohorts simultaneously. She assumed that “there is some variation in the adjacent cohorts’ peer composition within a grade within a school that is idiosyncratic and beyond the easy management of parents and schools (p.3). However, such adjacent cohorts data is rarely available. The proposed study therefore is to explore the measurement of peer effects, and to estimate the size of peer effects in Sweden. Multiple methods will be tested and the results will be compared and interpreted.

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