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National vs local funding for education: effects on growth and inequality

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  • Massimo Giannini

Abstract

This paper develops a two-period overlapping generations model with heterogeneous agents aiming at analysing how decentralization in the provision of public education affects growth and personal inequality via human capital investment. Education is financed by a tax levied by either national or local authorities. The tax rate is chosen according to a median voter mechanism. During their working period of life, individuals look after their offspring by providing them with a high level of school education stemming from taxation. In addition parent's contributions to the social security system provide them with retirement income. Heterogeneity accounts for the differences in the optimal taxation mechanism, linking the income distribution to the tax rate, and hence to human capital accumulation, growth and income inequality. In this way we relate differences among agents to the tax rate. We show that decentralization induces growth rate disparities among local communities but it can be ruled out by a proper fiscal substitution between social security and locally provided education. Unlike in the literature, this type of fiscal design allows local economies to grow faster and more equally than the national design.

Suggested Citation

  • Massimo Giannini, 2009. "National vs local funding for education: effects on growth and inequality," International Review of Applied Economics, Taylor & Francis Journals, vol. 23(3), pages 367-385.
  • Handle: RePEc:taf:irapec:v:23:y:2009:i:3:p:367-385
    DOI: 10.1080/02692170902811785
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    References listed on IDEAS

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    1. Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 651-664.
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