Mental health spillovers and human capital development: Evidence from middle schools in China

While adolescent mental health is crucial to human capital formation, less is known about whether mental-health risks generate externalities within educational social networks. This study utilizes large-scale survey data from Chinese middle schools and exploits institutional random assignment of students to classes to explore how peer environments shape students’ mental well-being, cognitive ability, and academic performance. We measure peer exposure using leave-one-out classroom prevalence of adverse home environments, which proxies peers’ latent mental-health risk. Our results demonstrate that greater exposure to peers facing elevated mental-health risk significantly impedes adolescents’ human capital development, including worsened mental well-being, as well as reduced cognitive ability and academic performance. These adverse effects are particularly pronounced among disadvantaged students and those with worse baseline well-being or academic performance, implying that adverse peer environments can amplify existing inequalities in human capital accumulation. Mechanism analysis reveals that deteriorated friendship quality and class environment, reduced study efforts and motivation, and perceived worsening teacher-student relationships are key mechanisms, whereas teachers’ self-reported instructional practices show limited adjustment. Overall, the findings suggest that school-based psychosocial supports may yield social returns beyond treated students by improving classroom emotional climate and reducing peer spillovers.