In light of the debate over inclusive education, this paper evaluates the impact of exposure to special needs (SN) peers. More classroom peers with SN lower performance, the probability of entering postcompulsory education, and income at ages 17 to 25. SN students and students at the lower end of the achievement distribution suffer most from higher inclusion. We analyze the effects of reallocation policies to alleviate negative externalities, and demonstrate that inclusion is preferable to segregation in terms of maximizing average test scores.

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