The Political Economy of Public Education

This work focuses on the political determination of a public education policy within the context of a general equilibrium macroeconomic model. The primary objective of this paper is to study whether publicly funded education can emerge and be sustained as a political and economic equilibrium in an economy where individual agents are selfish, rational and forward-looking. I construct an overlapping generations general equilibrium model that endogenizes the large involvement of the public sector in human capital investment. The agents work for the first two periods of their lives and then retire during the third period. The first generation agents may also allocate resources to the acquisition of human capital, but they cannot borrow against their future income. In a political equilibrium where the rational and forward-looking agents of the two oldest generations vote for a level of public funding of education, public financing of education is motivated by the complementarity between capital and labor in the production function and appears as an instrument to compensate for the absence of credit markets. Thus, public funding of education does not have to be chosen because of altruism or externalities. In an economy calibrated using U.S. data, I can match the high shares of GNP allocated to education observed in the U.S. economy. The share of publicly funded education is an increasing function of GNP which mirrors the observed disparities across countries with different levels of development. Furthermore, an increase in the social security tax rate reduces the share of GNP allocated to publicly funded education which might help explain differences across countries with similar levels of development. The constructed economy also supports the existence of poverty traps for relatively low levels of income per capita. An interesting feature is that, if we do not allow the young agents to work, the economy will get out of these poverty traps and will converge to a steady-state with high levels of physical and human capital.