Excerpts from this article have been assigned as required reading in the CDE core course ECON 504, "Public Economics." The excerpts include parts of pgs 795-799 and 810-812.
Duflo provides a nice difference-in-differences analysis using a natural policy experiment: a large-scale project to construct schools in Indonesia. She finds that for the cohort affected by the construction of schools, all those new schools going up increased students' time spent in school and their future wages.
Between 1973 and 1978, the Indonesian Government constructed over 61,000 primary schools throughout the country. This is one of the largest school construction programs on record. I evaluate the effect of this program on education and wages by combining differences across regions in the number of schools constructed with differences across cohorts induced by the timing of the program. The estimates suggest that the construction of primary schools led to an increase in education and earnings. Children aged 2 to 6 in 1974 received 0.12 to 0.19 more years of education for each school constructed per 1,000 children in their region of birth. Using the variations in schooling generated by this policy as instrumental variables for the impact of education on wages generates estimates of economic returns to education ranging from 6.8 percent to 10.6 percent.