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Educational Opportunity and Income Inequality

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Author Info
Paul Willen
Igal Hendel
Joel Shapiro

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Abstract

Affordable higher education is, and has been, a key element of social policy in the United States with broad bipartisan support. Financial aid has substantially increased the number of people who complete university - generally thought to be a good thing. We show, however, that making education more affordable can increase income inequality. The mechanism that drives our results is a combination of credit constraints and the `signaling' role of education first explored by Spence (1973). When borrowing for education is difficult, lack of a college education could mean that one is either of low ability or of high ability but with low financial resources. When government programs make borrowing or lower tuition more affordable, high-ability persons become educated and leave the uneducated pool, driving down the wage for unskilled workers and raising the skill premium.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10879.

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Date of creation: Nov 2004
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Handle: RePEc:nbr:nberwo:10879

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
H4 - Public Economics - - Publicly Provided Goods
I2 - Health, Education, and Welfare - - Education

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David A. Green, 2007. "A Cautionary Discussion about Relying on Human Capital Policy to Meet Redistributive Goals," Canadian Public Policy, University of Toronto Press, vol. 33(4), pages 397-418, December. [Downloadable!] (restricted)
  2. Tali Regev, 2007. "Imperfect information, self-selection and the market for higher education," Working Paper Series 2007-18, Federal Reserve Bank of San Francisco. [Downloadable!]
  3. Robert Dur, 2006. "Status-Seeking in Violent Subcultures and the Double Dividend of Zero-Tolerance," Tinbergen Institute Discussion Papers 06-005/1, Tinbergen Institute. [Downloadable!]
  4. Toshiki Tamai, 2009. "Inequality, unemployment, and endogenous growth in a political economy with a minimum wage," Journal of Economics, Springer, vol. 97(3), pages 217-232, July. [Downloadable!] (restricted)
  5. Yuki, Kazuhiro, 2009. "Education, Signaling, and Wage Inequality in a Dynamic Economy," MPRA Paper 16982, University Library of Munich, Germany. [Downloadable!]
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