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On the Importance of Fertility Behavior in School Finance Policy Design

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  • Kuzey Yilmaz

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    (Department of Economics, University of Rochester)

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    Abstract

    To design an optimal education policy, it is essential to account for the fertility differential between the poor and the rich because it affects the human capital investment through the child quantity-quality tradeoff of children. We develop a dynamic general equilibrium in which parents choose the quantity of children, transfer a preschool ability to their children, determine the quality of children by choosing private expenditures on basic education in addition to public expenditures on basic education, leave a bequest that could be used to finance college education. Moreover, there is an uncertainty in college completion depending on ability and endogenous wage determination based on the amount of schooling in the economy. It is very important to consider general equilibrium effects because the change in either fertility behavior or college outcomes as a result of policy changes leads to a large change in aggregate skill distribution. We find that ignoring fertility behavior, especially differential fertility substantially underestimates the role of credit constraints in the economy. We also analyze the impact of basic education subsidies and college subsidies on welfare, inequality, and intergenerational mobility. Strikingly, the choice between these two policies is found to be dependent on the magnitude of differential fertility rate.

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    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1403.pdf
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    Bibliographic Info

    Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1403.

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    Length: 24 pages
    Date of creation: Feb 2014
    Date of revision:
    Handle: RePEc:koc:wpaper:1403

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    Keywords: differential fertility; human capital investment; education subsidies; general equilibrium; inequality; intergenerational mobility.;

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    2. Hanushek, Eric & Leung, Charles Ka Yui & Yilmaz, Kuzey, 2014. "Borrowing Constraints, College Aid, and Intergenerational Mobility," MPRA Paper 54238, University Library of Munich, Germany.
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    8. Carneiro, Pedro & Heckman, James J., 2002. "The Evidence on Credit Constraints in Post-Secondary Schooling," IZA Discussion Papers 518, Institute for the Study of Labor (IZA).
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    20. Oguro, Kazumasa & Oshio, Takashi & Takahata, Junichiro, 2010. "Ability transmission, endogenous fertility, and educational subsidy," PIE/CIS Discussion Paper 482, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    21. Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," University of Western Ontario, Economic Policy Research Institute Working Papers 20024, University of Western Ontario, Economic Policy Research Institute.
    22. Maria E. Canon, 2010. "The role of schools in the production of achievement," Working Papers 2010-042, Federal Reserve Bank of St. Louis.
    23. Shleifer, Andrei & Summers, Lawrence H. & Bernheim, B. Douglas, 1986. "The Strategic Bequest Motive," Scholarly Articles 3721794, Harvard University Department of Economics.
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