Inequality, redistribution and the allocation of public spending in education. A political-economy approach

The incidence of public expenditure in education appears to be skewed in favour of the middle and upper classes. This paper inquires into the determinants of this bias using a political economy approach. We develop a model with two time periods with an election occurring between the two. In the first period, agents differ in their initial wealth. In the second period, differences in wealth are combined with differences in income. In the first period, the incumbent government issues debt to finance public spending in education and decides how to allocate available resources between primary and tertiary education. Both increase aggregate income, but while investment in primary education reduces income inequality, investment in tertiary education increases it. At the beginning of the second period, a two-party electoral competition is held and probabilistic voting decides the winner. By varying the parameters of the linear income tax, the elected policy-maker can redistribute resources between low and high income individuals, while by choosing a debt default rate she can renege on the promise to fully repay public obligations, redistributing resources from bond-holders to tax-payers. We show that the investment in primary education might not be (politically) viable. Intuitively, investment in primary education, by reducing income inequality with respect to wealth inequality, might increase the desired debt default rate of future policy makers, making issuing debt to finance primary education unfeasible.