How do Classmates Matter for the Class-size Effects?

This paper studies the effect of class-size reduction on students’ academic outcomes with a special focus on its heterogeneity based on classmates’ characteristics. We estimate the causal effects of class-size reduction on students’ mathematics and language test scores, controlling student-teacher fixed effects and applying the predicted class size with a cap as an instrument for the actual class size. Using rich panel data on Japanese primary school students, we find that the average effect of class size reduction is positive and robust for math test scores and that classes with high-ability classmates benefit even more from class size reduction. We find that the effect of class size reduction depends positively on the ability of the student with the lowest rank in a class. In addition, we find that classes with a high share of female students benefit more from class size reduction. Our findings provide strong support for the theoretical framework of Lazear (2001).