dropped after the implementation of the sanction. Over 2007-2013, the enrollment rates in primary and secondary schools were always around 97% and 89%, respectively (Source: Statistical Centre of Iran, otherwise noted). At the same time, the population of first-year college students decreased by 11.5%. Moreover, over the years of sanctions, the investment in children’s education measured by household spending on education has decreased on average by 43% (Source: calculation by the author using HIES). This reduction in households’ education spending could be because young children do not attend school and/or parents cut spending on school expenditures, for instance, choosing free public school instead of private school.

# **2.3 Mechanisms behind Sanctions**

In this section, I explore the mechanisms by which economic sanctions may decrease investment in children’s education. The sanctions affect children’s education through changes in the demand side (labor income and relative prices) and the supply side of schooling (government budget).

One mechanism by which the sanctions affect children’s education is through labor income. As explained above, as a result of the sanctions, labor earnings decreased in the treated industries. The changes in labor income may affect investment in children’s education through two channels: family budget constraint and changes in returns to education.

First, labor income shocks may affect children’s education through family budget constraints. An influential work, Acemoglu and Pischke (2001) provide theoretical and empirical support for the idea that parental resources can affect education decisions through budget and credit constraints because education is not a pure investment and can be a consumption good too. Reduction in family income after the sanctions may have made it harder for children to attend school. However, as explained above, households might adjust this shock to mitigate the impact of sanctions on children. For example, they can draw down savings or sell off assets to smooth consumption in response to a negative income shock (Browning and Lusardi (1996); Deaton (1992)). However, if sanctions increased uncertainty about future income, households may consume less and save more (Sandmo (1970)).<sup>22</sup> Second, labor income shocks may affect children’s education by decreasing returns to education, a theoretical possibility explored formally by Eckstein and Zilcha (1994). The accumulation of human capital is an investment decision. Since education is costly (tuition fees and foregone earnings), individuals will invest in additional schooling only if sufficiently higher future earnings compensate for these costs. Therefore, optimal investment in children’s education requires parents to take into account their children’s income gain due to their education. Falling labor income due to economic sanctions affects the returns to education. However, the effect of this change on education is not clear. On the one hand, it can decrease educational attainment by reducing expected earnings from additional schooling. On the other hand, poor labor market opportunities could increase the incentive for investment in human capital by increasing competition. Moreover, the wage rate decreased for all levels of education. In consequence, the income of some low education levels that used to be above the poverty line moved down to below the poverty line after the sanction. Thus, the incentive to invest in education can increase after the sanctions. Since the effect could go either way, the overall effect is ambiguous and depends on the relative strength of different effects. In

> 22I find no significant effect of sanctions on family savings and debt (Table **??** , panels C and D, in the supplementary online appendix available with this article at The World Bank Economic Review website)

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