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Liquidity Constraints, Fiscal Externalities, and Optimal Tuition Subsidies

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  • Nicholas Lawson

Abstract

A large literature focuses on two important rationales for government subsidies to college students: positive fiscal externalities from a larger tax base, and liquidity constraints. This paper provides a first attempt to gauge the relative importance of these mechanisms. I use US data in combination with two modeling approaches: calibration of a simple structural model of human capital accumulation, and a "sufficient statistics" approach. The resulting optimal subsidies are larger than median public tuition by about $3,000 per year. This finding is driven by fiscal externalities; optimal tuition subsidy policy is not sensitive to the extent of liquidity constraints.

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  • Nicholas Lawson, 2017. "Liquidity Constraints, Fiscal Externalities, and Optimal Tuition Subsidies," American Economic Journal: Economic Policy, American Economic Association, vol. 9(4), pages 313-343, November.
    • Handle: RePEc:aea:aejpol:v:9:y:2017:i:4:p:313-43
    Note: DOI: 10.1257/pol.20150079
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    Cited by:

    1. Mark Colas & Sebastian Findeisen & Dominik Sachs, 2021. "Optimal Need-Based Financial Aid," Journal of Political Economy, University of Chicago Press, vol. 129(2), pages 492-533.
    2. Lawson, Nicholas, 2015. "Social program substitution and optimal policy," Labour Economics, Elsevier, vol. 37(C), pages 13-27.
    3. Koen Declercq & Erwin Ooghe, 2021. "Should Higher Education Be Subsidized More?," CESifo Working Paper Series 9377, CESifo.

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    More about this item

    JEL classification:

    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy

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