This paper is mainly concerned with a laboratory study to investigate the effect of smear due to vertical drain installation. The extent of the smear zone around a vertical drain was studied utilizing a large-scale consolidometer apparatus. The test results reveal that a significant reduction in the horizontal permeability takes place toward a central drain, whereas the vertical permeabilty remains relatively unchanged. The radius of the smear zone was estimated to be a factor of four to five times the radius of the central drain (mandrel), and the measured ratio of horizontal to vertical permeability approached unity at the drain-soil interface. The laboratory measured settlements are subsequently compared with the predictions based on the theory of Hansbo and the finite element method. It is of relevance to note that the inclusion of the correct variation of permeability ratios of the smear zone in the plane strain finite element analysis improves the accuracy of settlement predictions.