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Accounting for the changing role of family income in determining college entry

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Author Info
Christoph Winter
Abstract

I present a computable dynamic general equilibrium model with overlapping generations and incomplete markets to measure the fraction of households constrained in their college entry decision. College education is financed by family transfers and public subsidies, where transfers are generated through altruism on part of the parents. Parents face a trade-off between making transfers to their children and own savings. Ceteris paribus, parents who expect lower future earnings transfer less and save more. Data from the 1986 Survey of Consumer Finances give support to this mechanism. I show that this trade-off leads to substantially higher estimates of the fraction of constrained households compared to the results in the empirical literature (18 instead of 8 percent). The model also predicts that an increment in parents' earnings uncertainty decreases their willingness to provide transfers. In combination with rising returns to education, which makes college going more attractive, this boosts the number of constrained youths and explains why family income has become more important for college access over the last decades in the U.S. economy.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp402.

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Date of creation: Jan 2009
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Handle: RePEc:zur:iewwpx:402

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Related research
Keywords: Dynamic general equilibrium models with overlapping generations; parental transfers; college enrolment and borrowing constraints;

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
H2 - Public Economics - - Taxation, Subsidies, and Revenue
I2 - Health, Education, and Welfare - - Education

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This page was last updated on 2009-11-19.

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