Having the wrong friends? Peer effects in adolescent substance use.

Swedish cross-sectional survey data on young individuals aged 12-18-year-old was used to analyse school-class based peer effects in binge drinking, smoking and illicit-drug use. Significant and positive peer effects were found for all three activities. By introducing school/grade fixed effects, the estimated peer effects were identified by variation in peer behaviour across school-classes within schools and grades, implying that estimates were not biased due to endogenous sorting of students across schools. Further, endogeneity bias due to bi-directionality of peer effects was found for binge drinking and smoking. Controlling for this source of endogeneity resulted in even stronger peer effects.