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Welfare Effects of Privatizing Public Education When Human Capital Investments Are Risky

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  • Fabian Kindermann

Abstract

In an overlapping-generations model with risky human capital investment, borrowing constraints, and intergenerational transmission of abilities, I examine the effects of a change from publicly to privately funded college education. I find that from this reform, college graduates are better off compared to other workers since the college wage premium increases by around 50 percent. The reform deteriorates aggregate efficiency by (i) enforcing liquidity constraints, (ii) abolishing public insurance provision against educational risk, and (iii) increasing utility costs of college education via intergenerational spillovers. A success-dependent student loan system can offset efficiency losses but fails to generate efficiency gains.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/666524
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File URL: http://www.jstor.org/stable/full/10.1086/666524
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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Human Capital.

Volume (Year): 6 (2012)
Issue (Month): 2 ()
Pages: 87 - 123

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Handle: RePEc:ucp:jhucap:doi:10.1086/666524

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Web page: http://www.journals.uchicago.edu/JHC/

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Cited by:
  1. Dirk Krueger & Alexander Ludwig, 2013. "Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation," PIER Working Paper Archive 13-035, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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