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Why to Invest in your Neighbor? Social Contract on Educational Investment


  • Panu Poutvaara


  • Vesa Kanniainen


It may be in the interest of low-ability individuals to subsidize the education of high-ability individuals. Sufficient conditions are surprisingly mild: positive externalities in education and complementarity in production between human capital and labor supllied by the low-ability individuals. However, tax competition and the free mobility of the educated give rise to time-inconsistency and free-riding problems which render such a social contract infeasible and result in a subotimally low investment in education.

Suggested Citation

  • Panu Poutvaara & Vesa Kanniainen, 1999. "Why to Invest in your Neighbor? Social Contract on Educational Investment," CESifo Working Paper Series 202, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_202

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    References listed on IDEAS

    1. Rehme, G., 1999. "Public Policies and Education, Economic Growth and Income Distribution," Economics Working Papers eco99/14, European University Institute.
    2. Bhagwati, Jagdish N. & Hamada, Koichi, 1982. "Tax policy in the presence of emigration," Journal of Public Economics, Elsevier, vol. 18(3), pages 291-317, August.
    3. Panu Poutvaara, 2000. "Education, Mobility of Labour and Tax Competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(6), pages 699-719, December.
    4. Antonio Ciccone & Giovanni Peri & Douglas Almond, "undated". "Capital, Wages, and Growth: Theory and Evidence," Working Papers 152, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    5. David E. Wildasin, 2000. "Labor-Market Integration, Investment in Risky Human Capital, and Fiscal Competition," American Economic Review, American Economic Association, vol. 90(1), pages 73-95, March.
    6. Claudia Goldin & Lawrence F. Katz, 1998. "The Origins of Technology-Skill Complementarity," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 693-732.
    7. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-715, September.
    8. Hamilton, Jonathan H, 1987. "Optimal Wage and Income Taxation with Wage Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 373-388, June.
    9. Sinn, Hans-Werner, 1997. "The selection principle and market failure in systems competition," Journal of Public Economics, Elsevier, vol. 66(2), pages 247-274, November.
    10. Wildasin, David E, 1995. " Factor Mobility, Risk and Redistribution in the Welfare State," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 527-546, December.
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    Cited by:

    1. Joachim Jickeli, 2001. "The Role of Markets and Government in Human-Capital Building and Education: A Research Program in Institutional Economics," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(1), pages 1-87, March.
    2. Andersson, Fredrik & Konrad, Kai A., 2001. "Globalization and Human Capital Formation," IZA Discussion Papers 245, Institute for the Study of Labor (IZA).

    More about this item


    Externalities in education; complementarity; social contract; tax competition;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity


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