IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Capital-Market Failure, Adverse Selection, and Equity Financing of Higher Education

  • Bas Jacobs
  • Sweder J. G. van Wijnbergen

We apply theories of capital-market failure to analyze optimal financing of risky higher education. In the market solution, students can only finance theireducation through debt. There is underinvestment in human capital because some students with socially profitable investments in human capital will not invest in education, due to adverse-selection problems in debt markets and because insurance markets for human-capital-related risk are absent. Legal limitations on the use of human capital in financial contracts cause this underinvestment; without them, private markets would optimally finance these risky investments through equity rather than debt and supply income insurance. The government, however, can circumvent this problem and implement equity and insurance contracts through the tax system by using a graduate tax. This paper shows that public equity financing of education coupled to provision of some income insurance is the optimal way to finance education when private markets fail due to adverse selection. We show that education subsidies to restore market inefficiencies are suboptimal.

If 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.

File URL: http://www.ingentaconnect.com/content/mohr/fa/2007/00000063/00000001/art00001
Download Restriction: Fulltext access is included for subscribers to the printed version.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 63 (2007)
Issue (Month): 1 (March)
Pages: 1-32

as
in new window

Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200703)63:1_1:cfasae_2.0.tx_2-9
Contact details of provider: Web page: https://www.mohr.de/fa

Order Information: Postal: Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany
Email:


References listed on IDEAS
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.:

as in new window
  1. Enrico Moretti, 2002. "Estimating the Social Return to Higher Education: Evidence From Longitudinal and Repeated Cross-Sectional Data," NBER Working Papers 9108, National Bureau of Economic Research, Inc.
  2. Nerlove, Marc, 1972. "On Tuition and the Costs of Higher Education: Prolegomena to a Conceptual Framework," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages S178-S218, Part II, .
  3. Barr, Nicholas, 1993. "Alternative Funding Resources for Higher Education," Economic Journal, Royal Economic Society, vol. 103(418), pages 718-28, May.
  4. Alan B. Krueger & Mikael Lindahl, 2000. "Education for Growth: Why and For Whom?," NBER Working Papers 7591, National Bureau of Economic Research, Inc.
  5. Pedro Carneiro & James J. Heckman, 2002. "The Evidence on Credit Constraints in Post--secondary Schooling," Economic Journal, Royal Economic Society, vol. 112(482), pages 705-734, October.
  6. Colm Harmon & Hessel Oosterbeek & Ian Walker, 2003. "The Returns to Education: Microeconomics," Journal of Economic Surveys, Wiley Blackwell, vol. 17(2), pages 115-156, 04.
  7. Nicholas Barr, 1993. "Alternative funding resources for higher education," LSE Research Online Documents on Economics 280, London School of Economics and Political Science, LSE Library.
  8. Edwin Leuven & Hessel Oosterbeek & Bas van der Klaauw, 2004. "The e ect of financial rewards on students achievement: Evidence from a randomized experiment," HEW 0410002, EconWPA.
  9. Robert Haveman & Barbara Wolfe, 1995. "The Determinants of Children's Attainments: A Review of Methods and Findings," Journal of Economic Literature, American Economic Association, vol. 33(4), pages 1829-1878, December.
  10. Hellmann, Thomas & Stiglitz, Joseph, 2000. "Credit and equity rationing in markets with adverse selection," European Economic Review, Elsevier, vol. 44(2), pages 281-304, February.
  11. Chapman, B., 1996. "Conceptual Issues and the Australian Experience with Income Contingent Charges for Higher Education," CEPR Discussion Papers 350, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  12. Karla Hoff & Andrew B. Lyon, 1994. "Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs," NBER Working Papers 4652, National Bureau of Economic Research, Inc.
  13. Stephen V. Cameron & James J. Heckman, 2001. "The Dynamics of Educational Attainment for Black, Hispanic, and White Males," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 455-499, June.
  14. Sinn, Hans-Werner, 1995. "A Theory of the Welfare State," CEPR Discussion Papers 1278, C.E.P.R. Discussion Papers.
  15. Stiglitz, Joseph E & Weiss, Andrew, 1992. "Asymmetric Information in Credit Markets and Its Implications for Macro-economics," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 694-724, October.
  16. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  17. Stephen Cameron & Christopher Taber, 2000. "Borrowing Constraints and the Returns to Schooling," NBER Working Papers 7761, National Bureau of Economic Research, Inc.
  18. James Heckman, 1998. "What should be our human capital investment policy?," Fiscal Studies, Institute for Fiscal Studies, vol. 19(2), pages 103-119, May.
  19. Bas Jacobs, 2002. "An investigation of education finance reform; graduate taxes and income contingent loans in the Netherlands," CPB Discussion Paper 9, CPB Netherlands Bureau for Economic Policy Analysis.
  20. Erik Plug & Wim Vijverberg, 2005. "Does Family Income Matter for Schooling Outcomes? Using Adoptees as a Natural Experiment," Economic Journal, Royal Economic Society, vol. 115(506), pages 879-906, October.
  21. de Meza, David & Webb, David, 1990. "Risk, Adverse Selection and Capital Market Failure," Economic Journal, Royal Economic Society, vol. 100(399), pages 206-14, March.
  22. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  23. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
  24. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  25. Garcia-Penalosa, Cecilia & Walde, Klaus, 2000. "Efficiency and Equity Effects of Subsidies to Higher Education," Oxford Economic Papers, Oxford University Press, vol. 52(4), pages 702-22, October.
  26. Nerlove, Marc L, 1975. "Some Problems in the Use of Income-contingent Loans for the Finance of Higher Education," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 157-83, February.
  27. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  28. Leuven, Edwin & Oosterbeek, Hessel & van der Klaauw, Bas, 2003. "The Effect of Financial Rewards on Students' Achievements: Evidence from a Randomized Experiment," CEPR Discussion Papers 3921, C.E.P.R. Discussion Papers.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:mhr:finarc:urn:sici:0015-2218(200703)63:1_1:cfasae_2.0.tx_2-9. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Wolpert)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.