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Optimal tax and education policy when agents differ in altruism and productivity

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  • CREMER, Helmuth
  • PESTIEAU, Pierre
  • THIBAULT, Emmanuel
  • VIDAL, Jean-Pierre

Abstract

This paper studies the design of education policies in a setting of overlapping generations with heterogeneous individuals. Individuals differ in productivity (high and low earning ability) and in altruism (altruists and non altruists). Only altruistic parents invest in education out of some joy of giving. Their investment determines the probability that a child has high ability. Education policies consist of a subsidy on private educational investments and of public education. We show that when an income tax is available, the subsidy on education should not depend on redistribution. Instead, it is determined by the following 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). Third, depending on the information structure there may be a substitution term that arises because the demand for second period consumption and for education transfer are interdependent. The first two terms are of opposite sign and the optimal subsidy may be positive or negative. Finally, we derive conditions under which public education is desirable. Public education affects also the probability of being highly productive for the altruists and the non altruists. Its desirability will in part depend on its substitutability with private educational investment.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -1830.

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Handle: RePEc:cor:louvrp:-1830

Note: In : Annals of Economics and Finance, 6, 209-228, 2005
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  1. CREMER, Helmuth & PESTIEAU, Pierre & ROCHET, Jean-Charles, 2001. "Capital income taxation when inherited wealth is not observable," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2001020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  3. 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, University of Chicago Press, vol. 100(4), pages 818-34, August.
  4. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(1), pages 135-64, February.
  5. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 843-67, June.
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Cited by:
  1. von Greiff, Camilo, 2007. "Effects of Redistribution Policies - Who Gains and Who Loses?," Research Papers in Economics, Stockholm University, Department of Economics 2007:12, Stockholm University, Department of Economics.

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