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Higher education funding, welfare and inequality in equilibrium

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  • Gustavo Mellior

Abstract

This paper analyses theoretically and quantitatively the effect that different higher education funding policies have on welfare (on aggregate and at the individual level) and wealth inequality. A heterogeneous agent model in continuous time, which has uninsurable income risk and endogenous educational choice is used to evaluate ï¬ ve different higher education ï¬ nancing schemes. Educational investments can be self ï¬ nanced, supported by government guaranteed student loans - that may come with or without income contingent support - or be covered by the public sector. When educational costs are small, differences in outcomes amongst systems are negligible. On the other hand, when these costs rise to realistic levels we see that there can be large gains in welfare and signiï¬ cant drops in inequality by moving to a system with more public sector support. This support can come in the form of tuition subsidies and/or income contingent student loans. However, as the cost of education and the share of debtors in society gets larger, it is preferable to increase public support in the form of tuition subsidies. The reason is that there is a pecuniary externality of debt that gets magniï¬ ed when student loans become excessive. While I identify large steady state welfare gains from more public sector ï¬ nancing, I show that the transition costs can be large enough to justify the status quo.

Suggested Citation

  • Gustavo Mellior, 2020. "Higher education funding, welfare and inequality in equilibrium," Economics Series Working Papers 908, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:908
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    1. Higher education funding, welfare and inequality in equilibrium
      by Christian Zimmermann in NEP-DGE blog on 2020-11-24 16:06:19

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    More about this item

    Keywords

    Incomplete markets; Higher education funding; Human capital;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions

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