  Peer influence on effort devoted to some activity is often studied using
proxy variables when actual effort is unobserved. For instance, in education,
academic effort is often proxied by GPA. We propose an alternative approach
that circumvents this approximation. Our framework distinguishes unobserved
shocks to GPA that do not affect effort from preference shocks that do affect
effort levels. We show that peer effects estimates obtained using our approach
can differ significantly from classical estimates (where effort is
approximated) if the network includes isolated students. Applying our approach
to data on high school students in the United States, we find that peer effect
estimates relying on GPA as a proxy for effort are 40% lower than those
obtained using our approach.
