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Universities as Stakeholders in their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education

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  • Tom McKenzie
  • Dirk Sliwka

Abstract

We compare up-front tuition fees with graduate taxes for funding higher education. Graduate taxes transfer the volatility in future income from risk-averse students to the risk-neutral state. However, a double moral-hazard problem arises when graduates' work effort and universities' teaching quality are endogenized. Graduate taxes reduce work incentives, but induce universities to improve teaching quality. Yet if revenues are distributed evenly among universities, there is free riding. This is solved by allocating each university the tax revenue from its own alumni. We also demonstrate how a budget-balancing graduate tax would encourage higher university participation than the equivalent tuition fee.

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Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 167 (2011)
Issue (Month): 4 (December)
Pages: 726-742

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201112)167:4_726:uasits_2.0.tx_2-o

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  1. Gary-Bobo, Robert J. & Trannoy, Alain, 2005. "Efficient Tuition & Fees, Examinations and Subsidies," CEPR Discussion Papers 5011, C.E.P.R. Discussion Papers.
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Cited by:
  1. Paul Angles, 2013. "L'impôt sur le diplôme comme alternative au mode de financement de l'enseignement supérieur en France : une évaluation par microsimulation," Post-Print dumas-00909926, HAL.

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