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The Design of Optimal Education Policies

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  • Gianni de Fraja

Abstract

This paper studies the education policy chosen by a utilitarian government. In the model, households differ in their income and in their children's ability; income is observed by the government, but ability is private information. Households can use private education, but cannot borrow to finance it. The government can finance education with income tax, but at the cost of blunting the individuals' incentive to exert labour market effort. The optimal education policy we derive is elitist: it increases the spread between the educational achievement of the bright and the less bright individuals, compared to private provision. It is also such that the education received by less bright individuals depends positively on their parental income. Finally, the optimal education policy is input regressive, in the sense of Arrow (1971, Quarterly Journal of Economics, 38, 175–208): households with higher income and brighter children contribute less in tuition fees towards the cost of the education system than households with lower income and less bright children. Copyright 2002, Wiley-Blackwell.

Suggested Citation

  • Gianni de Fraja, 2002. "The Design of Optimal Education Policies," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 437-466.
  • Handle: RePEc:oup:restud:v:69:y:2002:i:2:p:437-466
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    File URL: http://hdl.handle.net/10.1111/1467-937X.00212
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy

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