the supplementary online appendix (section S4.), I outline a simple model that identifies these two channels and describes conditions by which the incentive to invest in education may increase or decrease after the sanctions. Therefore, I empirically test the overall impact of sanctions in this paper.

Another mechanism by which economic sanctions may affect children’s education is through changes in the government’s budget. Based on the government budget documents, the 2006 UN sanctions did not affect public spending on education. The sanctions affected Iranian government revenue because on average 60% of Iranian government revenues come from oil and gas which was affected by the sanctions. However, as the government budget documents show, the real value of Iranian government’s spending on social programs, including health and education, did not show a significant response to this shock. In particular, public spending on education and each of its components (spending on primary to tertiary education) did not change after the sanctions (source: Government Budget documents and World Bank). As government budget documents show during the years of sanctions the Iranian government financed other expenditure by reducing the military spending, which is the major component of government spending. This state of budgetary management is not limited to the shock caused by the sanctions. Habibi (2001) and Farzanegan (2011) show that pre-sanctions oil revenue fluctuations in Iran and other Middle Eastern oil-exporting countries do not affect the basic social spending on education, health, and social welfare. Moreover, like most Middle Eastern countries, a large share of Iranian government spending on education is allocated to post-secondary education in large urban areas. The possible reason for this allocation is that governments are sensitive to the demands of the urban middle class, and college education is important for this group (Richards and Waterbury (1996)).

Economic sanctions may also affect children’s education through changes in relative prices. In addition to the reduction in household income, rising prices decreased households’ spending capacity. Over the years of sanctions, prices of many commodities spiraled upwards and inflation reached 35%. However, the magnitude of this change is different across goods and services. In particular, the prices of tradables (typically goods) have risen significantly relative to non-tradables (typically services). Thus, the relative prices and so the budget shares of the different commodities have changed.<sup>23</sup> Although education prices doubled, the changes are not as much as other commodities. The Education Price Index (EPI) increased on average 8% less than the overall rate of inflation.

# **3 Data**

The main data source is the Iranian Households Income and Expenditures Surveys (HIES).<sup>24</sup> These surveys, which are conducted yearly by the Statistics Centre of Iran (SCI), are designed to be representative of the population of Iran and cover near 40,000 households every year. HIES include extensive data on expenditures of households including education spending according to the Classification of Individual Consumption According to Purpose

> 23The budget shares of the various commodities are related to the real total expenditure and relative prices (Deaton and Muellbauer (1980)). Indeed, the descriptive analysis showed that sanctions significantly changed the households’ consumption patterns. The most significant change is related to the expenditure share allocated to food. While food prices became sixfold in 2013 since expenditure on food is necessary expenditure and unsubstitutable, expenditure share on food increased by 6% (from 40% to 46%).

> 24HIES are publicly available on www.amar.org.ir

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