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Intergenerational Transfer of Human Capital and Optimal Education Policy

  • Cremer, Helmuth
  • Pestieau, Pierre

This paper studies the design of education policies in a setting of successive generations with heterogeneous individuals (high and low earning ability). Parents' investment in education is motivated by warm glow altruism and determines the probability that a child has high ability. Education policies consist of a subsidy on private educational investments and possibly of public education. We show that when an income tax is available, the subsidy on education should not depend on redistributive considerations. Instead, it is determined by two terms. First, a Pigouvian term which arises because under warm glow altruism parents' utility does not properly account for the impact of education on future generations. The second term captures a 'merit good' effect, which arises when the warm glow term is not fully included in social welfare (possibility of laundering out). The two terms are of opposite sign and the optimal subsidy may be positive or negative. Finally, we derive conditions under which public education is welfare improving and show that total crowding out of private expenditure (for one of the types) may be desirable.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 318.

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Date of creation: Nov 2004
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Publication status: Published in Journal of Public Economic Theory, vol.�8, n°4, 2006, p.�529-545.
Handle: RePEc:ide:wpaper:3002
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  1. CREMER, Helmuth & PESTIEAU, Pierre & ROCHET, Jean-Charles, 2001. "Capital income taxation when inherited wealth is not observable," CORE Discussion Papers 2001020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  3. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  4. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-16, June.
  5. De Fraja, Gianni, 1998. "The Design of Optimal Education Policies," CEPR Discussion Papers 1792, C.E.P.R. Discussion Papers.
  6. Cremer, Helmuth & Gahvari, Firouz, 1997. "In-kind transfers, self-selection and optimal tax policy," European Economic Review, Elsevier, vol. 41(1), pages 97-114, January.
  7. Bénabou, Roland, 2000. "Tax And Education Policy In A Heterogeneous Agent Economy: What Levels Of Redistribution Maximize Growth And Efficiency?," CEPR Discussion Papers 2446, C.E.P.R. Discussion Papers.
  8. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  9. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
  10. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 135-64, February.
  11. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December.
  12. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
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