Choosing the type of income-contingent loan: risk-sharing versus risk-pooling
We study the relative preference for risk-sharing or risk-pooling income-contingent loans for higher education of risk-averse individuals who differ in their ability to benefit from education and inherited wealth. We then analyse the outcome of a majority vote between the two income-contingent schemes. We provide examples where the risk-pooling income-contingent loan is preferred by a majority. The implementation of risk-pooling schemes may however face adverse selection problems, which may be particularly relevant in the presence of student mobility. We explore the implications of allowing students to choose whether to have their loan insured in a risk-pooling fashion or not insured. We show that access to risk-pooling income-contingent loans can sometimes be guaranteed without resorting to coercion.
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