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Efficient Education Policy - A Second-Order Elasticity Rule

  • Wolfram F. Richter

Assuming a two-period model with endogenous choices of labor, education, and saving, efficient education policy is characterized for a Ramsey-like scenario in which the government is constrained to use linear instruments. It is shown that education should be effectively subsidized if, and only if, the elasticity of the earnings function is increasing in education. The strength of second-best subsidization increases in the elasticity of the elasticity of the earnings function. This second-order elasticity rule extends the well-known Ramsey-Boiteux inverse elasticity rule.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2969.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2969
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  1. Bas Jacobs & Lans Bovenberg, 2008. "Optimal Taxation of Human Capital and theEarnings Function," CESifo Working Paper Series 2250, CESifo Group Munich.
  2. repec:zbw:rwirep:0140 is not listed on IDEAS
  3. Bovenberg, A Lans & Jacobs, Bas, 2001. "Redistribution and Education Subsidies are Siamese Twins," CEPR Discussion Papers 3099, C.E.P.R. Discussion Papers.
  4. repec:zbw:rwirep:0210 is not listed on IDEAS
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