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Income tax, subsidies to education, and investments in human capital in a two-sector economy

Author Info

  • Mendolicchio, Concetta
  • Paolini, Dimitri
  • Pietra, Tito

Abstract

The paper studies a two-sector economy with investments in human and physical capital and imperfect labor markets. Workers and firms endogenously select the sector they are active in, and choose the amount of their investments. To enter the high-skill sector, workers must pay a fixed cost that we interpret as direct cost of education. The economy is characterized by two different pecuniary externalities. Given the distribution of the agents across sectors, at equilibrium, in each sector there is underinvestment in both human and physical capital, due to non-contractibility of investments. A second pecuniary externality is induced by the self-selection of the agents in the two sectors. When total factor productivities are sufficiently diverse, subsidies to labor income in the low skill sector and fixed taxes on the direct costs of education increase total surplus, while subsidies to labor income in the high skill sector can actually reduce it.

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File URL: https://mpra.ub.uni-muenchen.de/14772/1/MPRA_paper_14772.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14772.

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Date of creation: Mar 2009
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Handle: RePEc:pra:mprapa:14772
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Keywords: Human capital; Efficiency; Labour income tax;

Find related papers by JEL classification:

  • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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  1. 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).
  2. Zvi Griliches, 1970. "Notes on the Role of Education in Production Functions and Growth Accounting," NBER Chapters, in: Education, Income, and Human Capital, pages 71-127 National Bureau of Economic Research, Inc.
  3. Bovenberg, A.L. & Jacobs, B., 2001. "Redistribution and Education Subsidies are Siamese Twins," Discussion Paper 2001-82, Tilburg University, Center for Economic Research.
  4. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "Tax Policy and Human Capital Formation," NBER Working Papers 6462, National Bureau of Economic Research, Inc.
  5. A. Lans Bovenberg & Bas Jacobs, 2005. "Redistribution and Education Subsidies are Siamese Twins," Tinbergen Institute Discussion Papers 05-036/3, Tinbergen Institute.
  6. Bas Jacobs & A. Lans Bovenberg, 2011. "Optimal Taxation of Human Capital and the Earnings Function," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(6), pages 957-971, December.
  7. Angel de la Fuente, 2003. "Human capital in a global and knowledge-based economy," UFAE and IAE Working Papers 576.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  8. Mikael Lindahl & Alan B. Krueger, 2001. "Education for Growth: Why and for Whom?," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1101-1136, December.
  9. Daron Acemoglu, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 779-804.
  10. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June.
  11. A. D. Roy, 1951. "Some Thoughts On The Distribution Of Earnings," Oxford Economic Papers, Oxford University Press, vol. 3(2), pages 135-146.
  12. Anderberg, Dan & Andersson, Fredrik, 2003. "Investments in human capital, wage uncertainty, and public policy," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1521-1537, August.
  13. William Blankenau & Gabriele Camera, 2009. "Public Spending on Education and the Incentives for Student Achievement," Economica, London School of Economics and Political Science, vol. 76(303), pages 505-527, 07.
  14. Bas Jacobs, 2005. "Optimal Income Taxation with Endogenous Human Capital," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(2), pages 295-315, 05.
  15. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  16. Blankenau, William, 2005. "Public schooling, college subsidies and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 487-507, March.
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Cited by:

  1. Domenico Scalera, 2012. "Skilled Migration And Education Policies: Is There Still Scope For A Bhagwati Tax?," Manchester School, University of Manchester, vol. 80(4), pages 447-467, 07.

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