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When Does Government Debt Crowd Out Investment?

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  • Nora Traum

    (North Carolina State University)

  • Shu-Chun Yang

    (Congressional Budget Office)

Abstract

We investigate the relationship between inequality and education funding in a model of probabilistic voting over public education spending where the private option is available. A change in inequality can have opposite effects at different income levels: higher inequality decreases public spending per student and increases enrollment in public schools in poor economies, while the opposite holds in the rich ones. A change in the tax base can also have non-monotonic effects. We also study the implications of different voting participation across income groups. The predictions of the model are supported by U.S. school district-level data.

Suggested Citation

  • Nora Traum & Shu-Chun Yang, 2010. "When Does Government Debt Crowd Out Investment?," CAEPR Working Papers 2010-006, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    • Handle: RePEc:inu:caeprp:2010006
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