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Insuring Educational Risk: Opportunities versus Income

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Author Info
Dirk Schindler ()
Benjamin Weigert ()

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Abstract

We develop a model of education where individuals face educational risk. Successfully entering the skilled labor sector depends on individual effort in education and public resources, but educational risk still causes (income) inequality. We show that an optimal public policy consists of deferred skill-specific tuition fees, lump-sum transfers/taxes, and public funding of the educational sector. We argue that improved educational opportunities matter more than direct income transfers in a Second-best setting. Contrary to standard models of income risk, it is not optimal to use a proportional wage tax, because combining skill-specific tuition fees and public education spending provide both insurance and redistribution at lower costs. A wage tax is only optimal if skill-specific tuition fees are not available.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2348.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2348

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Related research
Keywords: human capital investment; endogenous risk; learning effort; optimal taxation; public education;

Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
I20 - Health, Education, and Welfare - - Education - - - General
J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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  2. Fredrik Andersson & Kai Konrad, 2003. "Globalization and Risky Human-Capital Investment," Asia-Pacific Financial Markets, Springer, vol. 10(3), pages 211-228, May. [Downloadable!] (restricted)
    Other versions:
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    Other versions:
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    Other versions:
  5. Garcia-Penalosa, Cecilia & Walde, Klaus, 2000. "Efficiency and Equity Effects of Subsidies to Higher Education," Oxford Economic Papers, Oxford University Press, vol. 52(4), pages 702-22, October.
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    Other versions:
  11. Bas Jacobs & Lans Bovenberg, 2008. "Optimal Taxation of Human Capital and the Earnings Function," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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    Other versions:
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    Other versions:
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This page was last updated on 2009-11-3.

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