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Why invest in your neighbor? Social contract on educational investment

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  • Poutvaara, Panu
  • Kanniainen, Vesa

Abstract

It may be in the interest of low-ability individuals to subsidize theeducation of high-ability individuals. The sufficient conditions aresurprisingly mild: positive externalities in education andcomplementarity in production between human capital and labor suppliedby the low-ability individuals. However, tax competition and the freemobility of the educated give rise to time-inconsistency and free-ridingproblems which render such a social contract infeasible and result in asuboptimally low investment in education.

Suggested Citation

  • Poutvaara, Panu & Kanniainen, Vesa, 2000. "Why invest in your neighbor? Social contract on educational investment," Munich Reprints in Economics 19797, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:19797
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    References listed on IDEAS

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    16. Johnson, George E, 1984. "Subsidies for Higher Education," Journal of Labor Economics, University of Chicago Press, vol. 2(3), pages 303-318, July.
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