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Liquidity Constraints, Fiscal Externalities and Optimal Tuition Subsidies

  • Nicholas Lawson

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    A large body of theoretical and empirical research focuses on two very different rationales for government subsidies to college students: positive fiscal externalities from greater human capital accumulation and a larger income tax base, and the existence of liquidity constraints among student borrowers. This paper provides a first attempt to gauge the relative importance of these two mechanisms. I use two different modelling approaches, both of which use US data on the effects of income and tuition subsidies on college enrollment to discipline the analysis: calibration of a simple structural model of human capital accumulation, and a "sufficient statistics" approach that employs behavioral elasticities within a social welfare optimality condition. The results imply optimal subsidies that are quite large, of a magnitude similar to median tuition at public universities. This finding is almost entirely driven by the fiscal externality channel, indicating that optimal tuition subsidy policy is not sensitive to the extent of liquidity constraints among students.

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    File URL: https://halshs.archives-ouvertes.fr/halshs-00964527v2/document
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    Paper provided by HAL in its series Working Papers with number halshs-00964527.

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    Date of creation: May 2014
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    Handle: RePEc:hal:wpaper:halshs-00964527
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00964527v2
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    1. Belley, Phillippe & Lochner, Lance, 2009. "The Changing Role of Family Income and Ability in Determining Educational Achievement," CLSSRN working papers clsrn_admin-2009-9, Vancouver School of Economics, revised 02 Feb 2009.
    2. Akyol, Ahmet & Athreya, Kartik B., 2003. "Risky higher education and subsidies," Working Paper 03-02, Federal Reserve Bank of Richmond.
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    5. Dynarski, Susan, 2005. "Building the Stock of College-Educated Labor," Working Paper Series rwp05-050, Harvard University, John F. Kennedy School of Government.
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    7. Matthew T. Johnson, 2010. "Borrowing Constraints, College Enrollment, and Delayed Entry," Working Papers 2011-006, Human Capital and Economic Opportunity Working Group, revised Sep 2012.
    8. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, 04.
    9. Richter, Wolfram F. & Braun, Christoph, 2009. "Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth," IZA Discussion Papers 4629, Institute for the Study of Labor (IZA).
    10. repec:zbw:rwirep:0210 is not listed on IDEAS
    11. Bovenberg, A Lans & Jacobs, Bas, 2001. "Redistribution and Education Subsidies are Siamese Twins," CEPR Discussion Papers 3099, C.E.P.R. Discussion Papers.
    12. Coelli, Michael B., 2011. "Parental job loss and the education enrollment of youth," Labour Economics, Elsevier, vol. 18(1), pages 25-35, January.
    13. A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute.
    14. Nicholas Lawson, 2013. "Fiscal Externalities and Optimal Unemployment Insurance," AMSE Working Papers 1357, Aix-Marseille School of Economics, Marseille, France, revised 21 Nov 2013.
    15. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April.
    16. Bohacek, Radim & Kapicka, Marek, 2008. "Optimal human capital policies," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 1-16, January.
    17. Baily, Martin Neil, 1978. "Some aspects of optimal unemployment insurance," Journal of Public Economics, Elsevier, vol. 10(3), pages 379-402, December.
    18. Michael F. Lovenheim, 2011. "The Effect of Liquid Housing Wealth on College Enrollment," Journal of Labor Economics, University of Chicago Press, vol. 29(4), pages 741 - 771.
    19. Nicholas Lawson, 2013. "Fiscal Externalities and Optimal Unemployment Insurance," Working Papers halshs-00907807, HAL.
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