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Borrowing Constraints, College Aid, and Intergenerational Mobility

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  • Eric A. Hanushek
  • Charles Ka Yui Leung
  • Kuzey Yilmaz

Abstract

The current level and form of subsidization of college education is often rationalized by appeal to capital constraints on individuals. Because borrowing against human capital is difficult, capital constraints can lead to nonoptimal outcomes unless government intervenes. We develop a simple dynamic general equilibrium model of the economy that permits us to explore the impact of alternative ways of subsidizing higher education. The key features of this model include endogenously determined bequests from parents that can be used to finance schooling, uncertainty in college completion related to differences in ability, and wage determination based upon the amount of schooling in the economy. Because policies toward college lead to large changes in schooling, it is very important to consider the general equilibrium effects on wages. Within this structure, we analyze tuition subsidies such as exist in most public colleges, alternative forms of need-based aid, income contingent loans, and merit-based aid. Each of these policies tends both to improve the efficiency of the economy while yielding more intergenerational mobility and greater income equality. But, the various policies have quite different implications for societal welfare, and the underlying subsidy patterns vary widely.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10711.

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Date of creation: Aug 2004
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Publication status: published as Eric A. Hanushek & Charles Ka Yui Leung & Kuzey Yilmaz, 2014. "Borrowing Constraints, College Aid, and Intergenerational Mobility," Journal of Human Capital, University of Chicago Press, vol. 8(1), pages 1 - 41.
Handle: RePEc:nbr:nberwo:10711

Note: LS PE CH
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Citations

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Cited by:
  1. Kuzey Yilmaz, 2014. "On the Importance of Fertility Behavior in School Finance Policy Design," Koç University-TUSIAD Economic Research Forum Working Papers 1403, Koc University-TUSIAD Economic Research Forum.
  2. repec:ebl:ecbull:v:15:y:2005:i:11:p:1-9 is not listed on IDEAS
  3. Bruce Chapman, 2005. "Income Contingent Loans for Higher Education: International Reform," CEPR Discussion Papers 491, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  4. 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.
  5. Hanushek, Eric A. & Leung, Charles Ka Yui & Yilmaz, Kuzey, 2003. "Redistribution through education and other transfer mechanisms," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1719-1750, November.
  6. Laura Romero, 2005. "On the role of borrowing constraints in public and private universities' choices," Economics Bulletin, AccessEcon, vol. 9(6), pages 1-8.
  7. repec:ebl:ecbull:v:9:y:2005:i:6:p:1-8 is not listed on IDEAS
  8. Charles Ka Yui Leung & Nan-Kuang Chen, 2006. "Intrinsic Cycles of Land Price: A Simple Model," Journal of Real Estate Research, American Real Estate Society, vol. 28(3), pages 293-320.
  9. Jorge Soares, 2008. "Borrowing Constraints, Parental Altruism and Welfare," Working Papers 08-12, University of Delaware, Department of Economics.
  10. Cunha, Flavio & Heckman, James J. & Lochner, Lance, 2006. "Interpreting the Evidence on Life Cycle Skill Formation," Handbook of the Economics of Education, Elsevier.
  11. Christoph Winter, 2007. "Accounting for the Changing Role of Family Income in Determining College Entry," Economics Working Papers ECO2007/49, European University Institute.

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