On the Costs and Benefits of a Mixed Educational Regime

This paper studies the costs and benefits of a mixed educational regime in which tax-financed public schools and tuition-financed private schools coexist. In the model, households are not allowed to borrow for education, but have a choice to educate their children in a public or a private school. The tax rate is determined by majority vote. The future income of children depends on the quality of education and stochastic ability. Using a numerical method, I calibrate the model to the U.S. economy, calculate the long-run outcomes and compare them with those in a purely public or private educational regime, consisting solely public or private schools. Simulations reveal that in the mixed regime long-run mean income is higher and long-run income inequality is lower than in the private regime. They also reveal that although there is no significant difference in long-run mean income between the mixed and the public regime, the tax rate and the quality of public education are significantly lower and thus long-run income inequality is higher in the mixed regime than in the public regime. To investigate the determinants of the performance of the mixed regime relative to the public or the private regime, I simulate the model with various parameter values. I find that the mixed regime generates higher long-run mean income than the public regime if the elasticity of future income to education is high. I also find that long-run mean income is higher (lower) in the mixed regime than in the public regime if the variance of stochastic ability is large (small). I use the model to evaluate the effects of the introduction of private educational vouchers. The results suggest that the introduction of vouchers improves long-run total welfare, and reduces long-run income inequality as long as public education is maintained.