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Universities as Stakeholders in their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education

  • McKenzie, Tom

    ()

    (City University London)

  • Sliwka, Dirk

    ()

    (University of Cologne)

We examine ways of funding higher education, comparing upfront tuition fees with graduate taxes. The tax dominates, as volatility in future income is transferred from risk-averse students to the risk-neutral state. However, a double moral hazard problem arises when students’ efforts to raise lifetime income and universities’ activities to improve teaching quality are endogenized. We show that graduate taxes reduce work incentives but provide incentives to improve teaching quality. Yet if tax revenues are distributed evenly among universities there is free riding. To solve this problem each university should be allocated the revenue generated by its own alumni. In addition, we demonstrate how a budget-balancing graduate tax would encourage more people to attend university than would the equivalent upfront tuition fee.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5330.

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Length: 19 pages
Date of creation: Nov 2010
Date of revision:
Publication status: published in: Journal of Institutional and Theoretical Economics, 2011, 167 (4), 726-742
Handle: RePEc:iza:izadps:dp5330
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  1. Gary-Bobo, Robert J. & Trannoy, Alain, 2005. "Efficient Tuition & Fees, Examinations and Subsidies," CEPR Discussion Papers 5011, C.E.P.R. Discussion Papers.
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