Why to Invest in your Neighbor? Social Contract on Educational Investment
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 supplied 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 suboptimally low investment in education.
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- Sinn, Hans-Werner, 1997.
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- 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.
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