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Human Capital and Optimal Redistribution

Author

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  • Winfried Koeniger

    (University of St. Gallen)

  • Julien Prat

    (ENSAE)

Abstract

We characterize optimal redistribution in a dynastic economy with observable human capital and hidden ability. We show that the wedge between human capital investment in the laissez faire and the social optimum differs from the wedge for bequests because (i) returns to human capital are risky, and (ii) human capital may change informational rents. We compute the optimal allocation when ability is persistent across generations, as calibrated for the U.S. We show how the allocation can be implemented with student loans featuring contingent repayments. The quantitative results reveal that human capital investment should (i) increase in parental income because of ability transmission across generations, but (ii) decrease in inherited assets because of the negative effect of wealth on labor supply. (Copyright: Elsevier)

Suggested Citation

  • Winfried Koeniger & Julien Prat, 2018. "Human Capital and Optimal Redistribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 1-26, January.
    • Handle: RePEc:red:issued:15-273
    DOI: 10.1016/j.red.2017.10.002
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    Cited by:

    1. Stefanie Stantcheva, 2020. "Dynamic Taxation," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 801-831, August.
    2. Mark Colas & Sebastian Findeisen & Dominik Sachs, 2021. "Optimal Need-Based Financial Aid," Journal of Political Economy, University of Chicago Press, vol. 129(2), pages 492-533.
    3. Kindermann, Fabian & Mayr, Lukas & Sachs, Dominik, 2020. "Inheritance taxation and wealth effects on the labor supply of heirs," Journal of Public Economics, Elsevier, vol. 191(C).
    4. Koeniger, Winfried & Zanella, Carlo, 2022. "Opportunity and inequality across generations," Journal of Public Economics, Elsevier, vol. 208(C).
    5. Robert J. Gary-Bobo & Alain Trannoy, 2015. "Optimal student loans and graduate tax under moral hazard and adverse selection," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 546-576, September.
    6. Sylwia Radomska, 2019. "Optimal Policy for Investment in Human Capital in the Light of Optimal Tax Theory (Inwestycje w kapital ludzki w swietle optymalnej teorii podatkowej)," Research Reports, University of Warsaw, Faculty of Management, vol. 1(30), pages 34-42.
    7. Sachs, Dominik & Abbott, Brant, 2016. "Universal versus Targeted Preschools: An Optimal Tax Approach," VfS Annual Conference 2016 (Augsburg): Demographic Change 145916, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Human capital; Bequests; Optimal taxation; Asymmetric information; Intergenerational equity; Student loans;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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