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Intergenerational transfer of human capital and optimal education policy

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  • CREMER, Helmuth
  • PESTIEAU, Pierre

Abstract

This paper studies the design of education policies in a setting of successive generations with heterogeneous individuals (high and low earning ability). Parents' investment in education is motivated by warm glow altruism and determines the probability that a child has high ability. Education policies consist of a subsidy on private educational investments and possibly of public education. We show that when an income tax is available, the subsidy on education should not depend on redistributive considerations. Instead, it is determined by two terms. First, a Pigouvian term which arises because under warm glow altruism parents' utility does not properly account for the impact of education on future generations. The second term captures a 'merit good' effect, which arises when the warm glow term is not fully included in social welfare (possibility of laundering out). The two terms are of opposite sign and the optimal subsidy may be positive or negative. Finally, we derive conditions under which public education is welfare improving and show that total crowding out of private expenditure (for one of the types) may be desirable.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2003030.

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Date of creation: 00 Apr 2003
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Handle: RePEc:cor:louvco:2003030

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References

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  1. De Fraja, Gianni, 1998. "The Design of Optimal Education Policies," CEPR Discussion Papers 1792, C.E.P.R. Discussion Papers.
  2. CREMER, Helmuth & PESTIEAU, Pierre & ROCHET, Jean-Charles, 2001. "Capital income taxation when inherited wealth is not observable," CORE Discussion Papers 2001020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Cremer, Helmuth & Gahvari, Firouz, 1997. "In-Kind Transfers, Self-Selection and Optimal Tax Policy," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  4. Bénabou, Roland, 2000. "Tax And Education Policy In A Heterogeneous Agent Economy: What Levels Of Redistribution Maximize Growth And Efficiency?," CEPR Discussion Papers 2446, C.E.P.R. Discussion Papers.
  5. Gerhard Glomm & Michael Kaganovich, 2003. "Distributional Effects of Public Education in an Economy with Public Pensions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 917-937, 08.
  6. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
  7. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  8. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
  9. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  10. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 135-64, February.
  11. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December.
  12. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  13. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-16, June.
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Citations

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Cited by:
  1. Helmuth Cremer & Pierre Pestieau, 2003. "Wealth Transfer Taxation: A Survey," Economics Working Paper Archive wp_394, Levy Economics Institute, The.
  2. Michele Bernasconi & Paola Profeta, 2007. "Redistribution or Education? The Political Economy of the Social Race," CESifo Working Paper Series 1934, CESifo Group Munich.
  3. Palivos, Theodore & Varvarigos, Dimitrios, 2011. "Intergenerational complementarities in education, endogenous public policy, and the relation between growth and volatility," MPRA Paper 31343, University Library of Munich, Germany.
  4. Marion Davin & Karine Gente & Carine Nourry, 2012. "Social optimum in an OLG model with paternalistic altruism," Economics Bulletin, AccessEcon, vol. 32(4), pages 3417-3424.
  5. Alessandra Casarico & Luca Micheletto & Alessandro Sommacal, 2011. "Intergenerational Transmission of Skills during Childhood and Optimal Public Policy," CESifo Working Paper Series 3343, CESifo Group Munich.
  6. CREMER, Helmuth & PESTIEAU, Pierre, 2004. "The tax treatment of intergenerational wealth transfers," CORE Discussion Papers 2004062, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Nikos Benos, 2004. "Education Policies and Economic Growth," University of Cyprus Working Papers in Economics 4-2004, University of Cyprus Department of Economics.
  8. Sano, Koichiro & Tomoda, Yasunobu, 2010. "Optimal public education policy in a two sector model," Economic Modelling, Elsevier, vol. 27(5), pages 991-995, September.

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