Peer Effects in Education
In other words, there are three findings. You should want your kids to be in a class with (1) high-achieving kids and (2) low variance in achievement. And (3) you should care more if you have a smart kid.
We find that students benefit from having higher achieving schoolmates and from having less variation in the quality of peers in their schools.... The marginal effect of a one percent increase in the quality of peers on student achievement is equivalent to between 8−15% of a one percent increase in one’s own earlier achievement.
We find that peer effects operate in a heterogeneous manner. High ability students benefit more from having higher achieving schoolmates and from having less variation in peer quality than students of lower ability.
Effect (2) suggests that ability tracking is generally beneficial, because it puts all kids in low-variance environments. However, because tracking raises the average peer for high-ability kids and lowers the average peer for low-ability kids, effect (1) makes high-ability kids achieve more and low-ability kids achieve less. Effect (3) then compounds the increased inequality.
In short, ability tracking appears to be a policy that increases efficiency and decreases equality--another example of the Big Trade-off.