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Intergenerational Transfer of Human Capital and Optimal Education Policy

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Author Info
Cremer, Helmuth
Pestieau, Pierre

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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 that 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4201.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4201

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Related research
Keywords: education policy human capital intergenerational transfers redistribution

Other versions of this item:

Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
I20 - Health, Education, and Welfare - - Education - - - General
I28 - Health, Education, and Welfare - - Education - - - Government Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Cremer, H. & Pestieau, P. & Rochet, J.-C., 2001. "Capital Income Taxation when Inherited Wealth is not Observable," Papers 0120, Catholique de Louvain - Center for Operations Research and Economics.
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 35-52, January. [Downloadable!] (restricted)
  5. De Fraja, Gianni, 1998. "The Design of Optimal Education Policies," CEPR Discussion Papers 1792, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May. [Downloadable!] (restricted)
  7. Roland Benabou, 2002. "Tax and Education Policy in a Heterogeneous-Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?," Econometrica, Econometric Society, vol. 70(2), pages 481-517, March. [Downloadable!] (restricted)
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  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 813-34, 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michele Bernasconi & Paola Profeta, 2007. "Redistribution or Education? The Political Economy of the Social Race," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  2. Nikos Benos, 2004. "Education Policies and Economic Growth," University of Cyprus Working Papers in Economics 4-2004, University of Cyprus Department of Economics. [Downloadable!]
  3. Christiane Schuppert, 2007. "Does mobility of educated workers undermine decentralized education policies?," Discussion Papers in Economics 07_01, University of Dortmund, Department of Economics. [Downloadable!]
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