Economists have paid attention to the importance of literacy for economic development. While
it is widely recognized that increasing the literacy rate in developing countries is an important
end in itself, economists have investigated the impacts of literacy on various economic activities
such as farm production (summarized in Lockheed et al., 1980), adoption of agricultural
innovations (Feder et al., 1985), and children’s nutritional status (Strauss and Thomas, 1995).
Literacy, or education more generally, is attained at an individual level. However, recent
empirical studies show that there are significant external benefits created by literate individuals.
Green et al. (1985) find that a farmer’s propensity to adopt modern agricultural practice is
enhanced by his own and his family’s literacy, indicating that literacy is a shared skill as well
as an individual phenomenon. Basu and Foster (1998) provide a concept that distinguishes
two types of illiterate individuals: “proximate illiterate” is defined as an illiterate person who
lives with at least one literate member in his/her household; “isolated illiterate” is defined as an
illiterate person who lives with no literate person in his/her household. The proximate illiterate
might benefit from easy access to a literate person. Using data from Papua New Guinea, Gibson
(2001) shows the evidence for shared literacy and finds that effects of shared literacy within
households are larger than the values supposed in Basu and Foster (1998). An important study
on this topic is Basu et al. (2002). They examine whether intra-household externality of literacy
and education exists. Using household survey data from Bangladesh, they tested existence of
the external effects of household literacy by regressing illiterate person’s wage earnings on an
indicator of family’s literacy and worker’s characteristics. Basu et al. (2002) find positive and
significant estimates of the indicator of household literacy, that is, they show that the proximate
illiterate earns significantly more than the isolated illiterate