Income tax, subsidies to education, and investments in human capital in a two-sector economy
AbstractThe paper studies a two-sector economy with investments in human and physical capital and imperfect labor markets. Workers and firms endogenously select the sector they are active in, and choose the amount of their investments. To enter the high-skill sector, workers must pay a fixed cost that we interpret as direct cost of education. The economy is characterized by two different pecuniary externalities. Given the distribution of the agents across sectors, at equilibrium, in each sector there is underinvestment in both human and physical capital, due to non-contractibility of investments. A second pecuniary externality is induced by the self-selection of the agents in the two sectors. When total factor productivities are sufficiently diverse, subsidies to labor income in the low skill sector and fixed taxes on the direct costs of education increase total surplus, while subsidies to labor income in the high skill sector can actually reduce it.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 14772.
Date of creation: Mar 2009
Date of revision:
Human capital; Efficiency; Labour income tax;
Find related papers by JEL classification:
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-25 (All new papers)
- NEP-DEV-2009-04-25 (Development)
- NEP-EDU-2009-04-25 (Education)
- NEP-HRM-2009-04-25 (Human Capital & Human Resource Management)
- NEP-LAB-2009-04-25 (Labour Economics)
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.:
- Bas Jacobs, 2005.
"Optimal Income Taxation with Endogenous Human Capital,"
Journal of Public Economic Theory,
Association for Public Economic Theory, vol. 7(2), pages 295-315, 05.
- Bas Jacobs, 2002. "Optimal Income Taxation with Endogenous Human Capital," Tinbergen Institute Discussion Papers 02-045/2, Tinbergen Institute.
- Bovenberg, A Lans & Jacobs, Bas, 2001.
"Redistribution and Education Subsidies are Siamese Twins,"
CEPR Discussion Papers
3099, C.E.P.R. Discussion Papers.
- Lans Bovenberg, A. & Jacobs, Bas, 2005. "Redistribution and education subsidies are Siamese twins," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2005-2035, December.
- A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute.
- Bovenberg, A.L. & Jacobs, B., 2001. "Redistribution and Education Subsidies are Siamese Twins," Discussion Paper 2001-82, Tilburg University, Center for Economic Research.
- repec:dgr:uvatin:2005036 is not listed on IDEAS
- Mikael Lindahl & Alan B. Krueger, 2001.
"Education for Growth: Why and for Whom?,"
Journal of Economic Literature,
American Economic Association, vol. 39(4), pages 1101-1136, December.
- Alan Krueger & Mikael Lindahl, 2000. "Education for Growth: Why and For Whom?," Working Papers 808, Princeton University, Department of Economics, Industrial Relations Section..
- Alan B. Krueger & Mikael Lindahl, 2000. "Education for Growth: Why and For Whom?," NBER Working Papers 7591, National Bureau of Economic Research, Inc.
- James J. Heckman & Lance Lochner & Christopher Taber, 1998.
"Tax Policy and Human Capital Formation,"
NBER Working Papers
6462, National Bureau of Economic Research, Inc.
- Angel de la Fuente & Antonio Ciccone, 2003.
"Human capital in a global and knowledge-based economy,"
70, Barcelona Graduate School of Economics.
- Angel de la Fuente, 2003. "Human capital in a global and knowledge-based economy," UFAE and IAE Working Papers 576.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Angel de la Fuente & Antonio Ciccone, 2003. "Human capital in a global and knowledge-based economy," UFAE and IAE Working Papers 562.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Blankenau, William, 2005. "Public schooling, college subsidies and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 487-507, March.
- William Blankenau & Gabriele Camera, 2009. "Public Spending on Education and the Incentives for Student Achievement," Economica, London School of Economics and Political Science, vol. 76(303), pages 505-527, 07.
- Anderberg, Dan & Andersson, Fredrik, 2003. "Investments in human capital, wage uncertainty, and public policy," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1521-1537, August.
- Caucutt, Elizabeth M. & Kumar, Krishna B., 2003.
"Higher education subsidies and heterogeneity: a dynamic analysis,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 27(8), pages 1459-1502, June.
- Elizabeth M. Caucutt & Krishna B. Kumar, 2000. "Higher Education Subsidies and Heterogeneity, A Dynamic Analysis," RCER Working Papers 472, University of Rochester - Center for Economic Research (RCER).
- Bas Jacobs & A. Lans Bovenberg, 2011.
"Optimal Taxation of Human Capital and the Earnings Function,"
Journal of Public Economic Theory,
Association for Public Economic Theory, vol. 13(6), pages 957-971, December.
- Bas Jacobs & Lans Bovenberg, 2008. "Optimal Taxation of Human Capital and theEarnings Function," CESifo Working Paper Series 2250, CESifo Group Munich.
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
- Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June.
- Zvi Griliches, 1970. "Notes on the Role of Education in Production Functions and Growth Accounting," NBER Chapters, in: Education, Income, and Human Capital, pages 71-128 National Bureau of Economic Research, Inc.
- Acemoglu, Daron, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 779-804, August.
- Domenico Scalera, 2012.
"Skilled Migration And Education Policies: Is There Still Scope For A Bhagwati Tax?,"
University of Manchester, vol. 80(4), pages 447-467, 07.
- Scalera, Domenico, 2009. "Skilled migration and education policies: Is there still scope for a Bhagwati tax?," MPRA Paper 19643, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.