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Liquidity Constraints, Fiscal Externalities and Optimal Tuition Subsidies Optimal College Tuition Subsidies

  • Nicholas Lawson


    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)

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    A large body of theoretical and empirical research focuses on two very different rationales for government subsidies to college students: positive fiscal externalities from greater human capital accumulation and a larger income tax base, and the existence of liquidity constraints among student borrowers. This paper provides a first attempt to gauge the relative importance of these two mechanisms. I use two different modelling approaches, both of which use US data on the effects of income and tuition subsidies on college enrollment to discipline the analysis: calibration of a simple structural model of human capital accumulation, and a "sufficient statistics" approach that employs behavioral elasticities within a social welfare optimality condition. The results imply optimal subsidies that are quite large, of a magnitude similar to median tuition at public universities. This finding is almost entirely driven by the fiscal externality channel, indicating that optimal tuition subsidy policy is not sensitive to the extent of liquidity constraints among students.

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    Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1404.

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    Length: 38 pages
    Date of creation: 18 Mar 2014
    Date of revision: 18 Mar 2014
    Handle: RePEc:aim:wpaimx:1404
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