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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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    1. Susanne Schennach & James Heckman & Flavio Cunha, 2007. "Estimating the Technology of Cognitive and Noncognitive Skill Formation," 2007 Meeting Papers 973, Society for Economic Dynamics.
    2. Shleifer, Andrei & Summers, Lawrence H. & Bernheim, B. Douglas, 1986. "The Strategic Bequest Motive," Scholarly Articles 3721794, Harvard University Department of Economics.
    3. 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.
    4. 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).
    5. John Fender & Ping Wang, 2003. "Educational Policy in a Credit Constrained Economy with Skill Heterogeneity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 939-964, 08.
    6. Gary S. Becker & Robert J. Barro, 1986. "A Reformulation of the Economic Theory of Fertility," NBER Working Papers 1793, National Bureau of Economic Research, Inc.
    7. Solon, Gary, 1992. "Intergenerational Income Mobility in the United States," American Economic Review, American Economic Association, vol. 82(3), pages 393-408, June.
    8. 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, .
    9. Eric A. Hanushek & Charles Ka Yui Leung & Kuzey Yilmaz, 2014. "Borrowing Constraints, College Aid, and Intergenerational Mobility," Journal of Human Capital, University of Chicago Press, vol. 8(1), pages 1 - 41.
    10. Garratt, Rod & Marshall, John M, 1994. "Public Finance of Private Goods: The Case of College Education," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 566-82, June.
    11. Maria Eugenia Canon, 2010. "The Role of Schools in the production of achievement," 2010 Meeting Papers 543, Society for Economic Dynamics.
    12. Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," University of Western Ontario, Economic Policy Research Institute Working Papers 20024, University of Western Ontario, Economic Policy Research Institute.
    13. Carneiro, Pedro & Heckman, James J., 2002. "The Evidence on Credit Constraints in Post-Secondary Schooling," IZA Discussion Papers 518, Institute for the Study of Labor (IZA).
    14. B. Douglas Bernheim & Sergei Severinov, 2000. "Bequests as Signals: An Explanation for the Equal Division Puzzle," NBER Working Papers 7791, National Bureau of Economic Research, Inc.
    15. Elizabeth M. Caucutt & Krishna B. Kumar, 2000. "Higher Education Subsidies and Heterogeneity, A Dynamic Analysis," RCER Working Papers 472, University of Rochester - Center for Economic Research (RCER).
    16. 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.
    17. Oguro, Kazumasa & Oshio, Takashi & Takahata, Junichiro, 2010. "Ability transmission, endogenous fertility, and educational subsidy," PIE/CIS Discussion Paper 482, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    18. 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.
    19. Hanushek, Eric & Yilmaz, Kuzey, 2007. "The complementarity of Tiebout and Alonso," Journal of Housing Economics, Elsevier, vol. 16(2), pages 243-261, June.
    20. 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.
    21. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    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. Gary Solon, 2002. "Cross-Country Differences in Intergenerational Earnings Mobility," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 59-66, Summer.
    24. Galor, Oded & Zang, Hyoungsoo, 1997. "Fertility, income distribution, and economic growth: Theory and cross-country evidence," Japan and the World Economy, Elsevier, vol. 9(2), pages 197-229, May.
    25. 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, .
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