children. I add one to the values of these variables and then log-transformed).<sup>52</sup> As this table shows, households cut spending on education by 58%. In particular, households spent less on primary/secondary school tuition by 40% (its share decreased by 3%.). Knowing that the sanctions did not affect enrollment in primary and high schools, this finding indicates that households respond to the sanctions by substituting away from higher-quality private schools towards lower-quality public schools for their children. Although, I do not observe the type of schools (private vs public) in the data, I use family spending on school tuition as a proxy for choosing private school for at least one child in the household and find a 5 percentage points reduction in choosing private schools among treated households compared to control households (Table S6).<sup>53</sup> Moreover, households spent 71% less on university tuition, which is consistent with a reduction in college enrollment found in the previous section. Although the number of seats at public universities is limited, a shift from private universities to public universities may explain some of this reduction in spending on university tuition. For example, before the sanctions, some students in large cities would choose to remain in their cities and enroll in private universities instead of enrolling in public universities in small cities. The reduction in family income could force these students to move to fee-free public universities. The immigration data does not support this hypothesis. Although the type of university is not observable in the data, the cross-country migration for education decreased from 9% before the sanction to only 4% in 2012. As is explained above, the sanctions had no significant effect on total immigration and distribution of different migrant groups.

Also, spending on books and private tutoring decreased by 34% and 54%, respectively. A large share of spending on private tutoring is for pre-university students to increase their probability of success at the public universities entrance examination. Thus, children from treated households faced a decline in the financial resource available to enroll in private universities, as well as a reduction in receiving private tutoring, which may have increased their chance of getting placed in a public university.

An important concern is that the decline of fertility in Iran over the past decades could explain the reduction in household education spending. The average number of students in households decreased from 2.2 in 1995-2006 (pre-sanctions) to 1.5 in the 2007-2013 period (post-sanctions).<sup>54</sup> To check for this possibility, I evaluate the effect of the sanctions on education spending per child (Table 3, the last column). The results show reductions in education spending for each child, in particular per child spending on school and university tuition significantly decreased by 38% and 74%, respectively.

# **5.2.3 Income Elasticity of Education Spending**

To compare these negative effects on education spending to the current literature, I calculate the income elasticities of education spending. Following Grimm (2011), I use a 2SLS estimator and instrument income with the interaction effect of being a child in a treated household after the sanctions conditional on being in a treated household and the time effects. As explained above, since HIES is a cross-sectional survey, I observe single-year measures of 52For school tuition, the sample consists of all children aged 6-24 who have not graduated from high school. For university tuition, the sample consists of high school graduates aged below 24 years. For spending on books and private tutoring, I consider all children aged 6-24.

> 53Also, as Panel B of Table **??** shows, treated households with more girls are less likely to choose a private school for their children after the sanctions than households with more boys.

> 54The average number of children in households who are enrolled in schools (primary and high schools) and universities decreased from 2 to 1.4 and from 0.2 to 0.1, respectively.

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