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Life in shakles? The quantitative implications of reforming the educational financing system

Author

Listed:
  • Ben Heijdra

    (University of Groningen)

  • Fabian Kindermann

    (University of Bonn)

  • Laurie Reijnders

    (University of Groningen)

Abstract

We conduct a quantitative analysis of educational financing systems in a stochastic overlapping generations model in which human capital can be enhanced through both formal schooling and learning-by-doing. The model is calibrated to the United States economy, including a stylized version of its student loan system. We find that moving to an income-contingent educational financing system, whereby transfers to students are financed from taxes on labor income, generates aggregate welfare gains. Such a system improves risk-sharing among college graduates and incentivizes individuals to obtain more education. These positive effects overturn the negative impact from labor supply distortions. Reforming the educational financing system towards income contingency, however, generates a considerable amount of transitional dynamics, so that welfare gains and losses are distributed unevenly across generations. (Copyright: Elsevier)

Suggested Citation

  • Ben Heijdra & Fabian Kindermann & Laurie Reijnders, 2017. "Life in shakles? The quantitative implications of reforming the educational financing system," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 37-57, April.
  • Handle: RePEc:red:issued:16-86 DOI: 10.1016/j.red.2017.02.006
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • 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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