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On the Importance of Fertility Behavior in School Finance Policy Design

  • Kuzey Yilmaz

    ()

    (Department of Economics, University of Rochester)

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    To design an optimal education policy, it is essential to account for the fertility differential between the poor and the rich because it affects the human capital investment through the child quantity-quality tradeoff of children. We develop a dynamic general equilibrium in which parents choose the quantity of children, transfer a preschool ability to their children, determine the quality of children by choosing private expenditures on basic education in addition to public expenditures on basic education, leave a bequest that could be used to finance college education. Moreover, there is an uncertainty in college completion depending on ability and endogenous wage determination based on the amount of schooling in the economy. It is very important to consider general equilibrium effects because the change in either fertility behavior or college outcomes as a result of policy changes leads to a large change in aggregate skill distribution. We find that ignoring fertility behavior, especially differential fertility substantially underestimates the role of credit constraints in the economy. We also analyze the impact of basic education subsidies and college subsidies on welfare, inequality, and intergenerational mobility. Strikingly, the choice between these two policies is found to be dependent on the magnitude of differential fertility rate.

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    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1403.pdf
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    Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1403.

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    Length: 24 pages
    Date of creation: Feb 2014
    Date of revision:
    Handle: RePEc:koc:wpaper:1403
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    4. Flavio Cunha & James J. Heckman & Susanne M. Schennach, 2010. "Estimating the Technology of Cognitive and Noncognitive Skill Formation," Econometrica, Econometric Society, vol. 78(3), pages 883-931, 05.
    5. Hanushek, Eric & Leung, Charles Ka Yui & Yilmaz, Kuzey, 2014. "Borrowing Constraints, College Aid, and Intergenerational Mobility," MPRA Paper 54238, University Library of Munich, Germany.
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    7. Pedro Carneiro & James J. Heckman, 2002. "The Evidence on Credit Constraints in Post--secondary Schooling," Economic Journal, Royal Economic Society, vol. 112(482), pages 705-734, October.
    8. Solon, Gary, 1992. "Intergenerational Income Mobility in the United States," American Economic Review, American Economic Association, vol. 82(3), pages 393-408, June.
    9. Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," Working Papers diegor-02-03, University of Toronto, Department of Economics.
    10. DE LA CROIX, David & DOEPKE, Matthias, 2001. "Inequality and Growth : Why Differential Fertility Matters," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001008, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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    16. Willis, Robert J, 1973. "A New Approach to the Economic Theory of Fertility Behavior," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages S14-64, Part II, .
    17. Hanushek, Eric & Yilmaz, Kuzey, 2007. "The complementarity of Tiebout and Alonso," Journal of Housing Economics, Elsevier, vol. 16(2), pages 243-261, June.
    18. Gary Solon, 2002. "Cross-Country Differences in Intergenerational Earnings Mobility," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 59-66, Summer.
    19. Hanushek, Eric & Charles Ka Yui Leung & Kuzey Yilmaz, 2002. "Redistribution through Education and Other Transfer Mechanisms," Royal Economic Society Annual Conference 2002 94, Royal Economic Society.
    20. Gary S. Becker & Robert J. Barro, 1988. "A Reformulation of the Economic Theory of Fertility," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 1-25.
    21. Robert Haveman & Barbara Wolfe, 1995. "The Determinants of Children's Attainments: A Review of Methods and Findings," Journal of Economic Literature, American Economic Association, vol. 33(4), pages 1829-1878, December.
    22. Janet Currie & Duncan Thomas, 1999. "Early Test Scores, Socioeconomic Status and Future Outcomes," NBER Working Papers 6943, National Bureau of Economic Research, Inc.
    23. Becker, Gary S & Lewis, H Gregg, 1973. "On the Interaction between the Quantity and Quality of Children," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages S279-88, Part II, .
    24. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-89, December.
    25. Casey B. Mulligan, 1999. "Galton versus the Human Capital Approach to Inheritance," Journal of Political Economy, University of Chicago Press, vol. 107(S6), pages S184-S224, December.
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