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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. 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.
  2. Christoph Winter, 2007. "Accounting for the Changing Role of Family Income in Determining College Entry," Economics Working Papers, European University Institute ECO2007/49, European University Institute.
  3. Kuzey Yilmaz, 2014. "On the Importance of Fertility Behavior in School Finance Policy Design," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1403, Koc University-TUSIAD Economic Research Forum.
  4. Eric Hanushek & Charles Ka Yui Leung & Kuzey Yilmaz, 2001. "Redistribution through Education and Other Transfer Mechanisms," NBER Working Papers 8588, National Bureau of Economic Research, Inc.
  5. repec:ebl:ecbull:v:15:y:2005:i:11:p:1-9 is not listed on IDEAS
  6. Cunha, Flavio & Heckman, James J. & Lochner, Lance, 2006. "Interpreting the Evidence on Life Cycle Skill Formation," Handbook of the Economics of Education, Elsevier, Elsevier.
  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, 2005. "Intrinsic Cycles of Land Price: A Simple Model," Discussion Papers, Chinese University of Hong Kong, Department of Economics 00005, Chinese University of Hong Kong, Department of Economics.
  9. Kazumasa Oguro & Takashi Oshio & Junichiro Takahata, 2013. "Ability transmission, endogenous fertility and educational subsidy," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 45(17), pages 2469-2479, June.
  10. Laura Romero, 2005. "On the role of borrowing constraints in public and private universities' choices," Economics Bulletin, AccessEcon, vol. 9(6), pages 1-8.
  11. Jorge Soares, 2008. "Borrowing Constraints, Parental Altruism and Welfare," Working Papers, University of Delaware, Department of Economics 08-12, University of Delaware, Department of Economics.

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