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Risky higher education and subsidies

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  • Ahmet Akyol
  • Kartik Artheya

Abstract

Tertiary education in the U.S. requires large investments that are risky, lumpy, and well-timed. Tertiary education is also heavily subsidized. By making the risk of human capital investment more acceptable, especially to low wealth households, subsidies may increase investment in human capital, lower long-run inequality, and reduce aggregate precautionary savings. However, subsidies also encourage more poorly prepared students to attend and are usually financed via distortionary taxes. In this paper, we find that observed collegiate subsidies improve welfare substantially relative to the fully decentralized (zero subsidy) outcome. We show that subsidies help smooth consumption, lower skill premia, increase interest rates as precautionary savings fall, lower the inequality of both consumption and wealth, increase intergenerational income mobility and raise welfare, even when financed by distortionary taxes.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 03-02.

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Date of creation: 2003
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Handle: RePEc:fip:fedrwp:03-02

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Keywords: Macroeconomics ; Education ; Human capital;

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Citations

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Cited by:
  1. Gonzalo Castex, 2010. "Accounting for Changes in College Attendance Profile: a Quantitative Life-Cycle Analysis," Working Papers Central Bank of Chile 598, Central Bank of Chile.
  2. John Bailey Jones & Fang Yang, 2012. "Skill-Biased Technical Change and the Cost of Higher Education," Discussion Papers 12-08, University at Albany, SUNY, Department of Economics.
  3. Felicia Ionescu & Satyajit Chatterjee, 2008. "Insuring College Failure Risk," 2008 Meeting Papers 813, Society for Economic Dynamics.
  4. Satyajit Chatterjee & Felicia Ionescu, 2012. "Insuring student loans against the financial risk of failing to complete college," Quantitative Economics, Econometric Society, vol. 3(3), pages 393-420, November.
  5. Christoph Winter, 2007. "Accounting for the Changing Role of Family Income in Determining College Entry," Economics Working Papers ECO2007/49, European University Institute.
  6. Fang Yang & John Jones, 2012. "Skill-Biased Technical Change and the Cost of Higher Education: An Exploratory Model," 2012 Meeting Papers 597, Society for Economic Dynamics.
  7. Nicholas Lawson, 2014. "Liquidity Constraints, Fiscal Externalities and Optimal Tuition Subsidies," Working Papers halshs-00964527, HAL.
  8. Matthew T. Johnson, 2010. "Borrowing Constraints, College Enrollment, and Delayed Entry," Working Papers 2011-006, Human Capital and Economic Opportunity Working Group, revised Sep 2012.
  9. repec:hka:wpaper:2013-02 is not listed on IDEAS
  10. William Blankenau & Steven Cassou & Beth Ingram, 2007. "Allocating Government Education Expenditures Across K-12 and College Education," Economic Theory, Springer, vol. 31(1), pages 85-112, April.
  11. Mark P. Keightley & Carlos Garriga, 2009. "A General Equilibrium Theory of College with Education Subsidies, In-School Labor Supply, and Borrowing Constraints," 2009 Meeting Papers 1180, Society for Economic Dynamics.
  12. Carlos Garriga & Mark P. Keightley, 2013. "A General Equilibrium Theory of College with Education Subsidies, In-School Labor Supply, and Borrowing Constraints," Working Papers 2013-002, Human Capital and Economic Opportunity Working Group.
  13. Gonzalo Castex, 2011. "College Risk and Return," Working Papers Central Bank of Chile 606, Central Bank of Chile.
  14. Nicholas Lawson, 2014. "Liquidity Constraints, Fiscal Externalities and Optimal Tuition Subsidies Optimal College Tuition Subsidies," AMSE Working Papers 1404, Aix-Marseille School of Economics, Marseille, France, revised 18 Mar 2014.
  15. Viktar Fedaseyeu & Vitaliy Strohush, 2012. "Loans from the Government, Overinvestment by Households, and Asset Bubbles," Working Papers 443, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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