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Shutting the Stable Door after the Horse Has Bolted? On Educational Risk and the Quality of Education

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  • Dirk Schindler
  • Benjamin Weigert

Abstract

We analyze whether a redistributive government should provide ex ante insurance against unfortunate outcomes or whether it should instead rely on transfers for redistributing income ex post. To this end, we develop a model of education in which individuals face educational risk and wage dispersion across two types of skills. Successful graduation and working as a skilled worker depends on individual effort in education and on public resources, but educational risk still causes (income) inequality. We show that in a second-best setting, in which learning effort is not observable, improving the quality of education by public funding of the educational sector has a significant effect and that this increases efficiency in comparison to a pure (linear) income tax with income transfers from skilled to unskilled workers. Compared to a first-best solution, providing ex ante insurance significantly gains importance relative to traditional ex post redistribution, because it simultaneously alleviates moral hazard in education. These results are strengthened when a (distortionary) skill-specific tax can be implemented.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3436.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3436

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Related research

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

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  1. Ignacio Palacios-Huerta, 2001. "An Empirical Analysis of the Risk Properties of Human Capital Returns," Working Papers 2001-10, Brown University, Department of Economics.
  2. Costa, Carlos Eugênio da & Maestri, Lucas Jóver, 2004. "The risk-properties of human capital and the design of government policies," Economics Working Papers (Ensaios Economicos da EPGE) 554, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
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