Beyond Serrano vs. Priest: National Funding of Education

This paper develops a political economy of public funding of education to evaluate the welfare implications of a move from a stateÜwide education financing policy to a nationÜwide education financing policy. In a general equilibrium overlapping generations model where parents care about their children's lifetime utility, the rational and forward-looking agents vote for a level of public funding of education. In contrast to existing theories, we do not assume factor prices are invariant and the effects of an education policy on factor prices are important in the determination of the equilibrium level of this policy. While altruism plays a central political role, the complementarity between capital and labor in the production function induces support for a higher level of publicly funded education, and the equilibrium tax rate is higher when the educational policy has an impact on the factor prices. Further, with a payÜasÜyouÜgo social security system, increased labor skill level affects the level of benefits received by the retirees and also influences the political choice of the agents. I show that a move from a stateÜ to a nationÜwide decision level, where the impacts of the educational policy on factor prices and social security benefits are internalized by the voters, can increase the level of income in the economy and the welfare of the agents. Further, the benefits of the general equilibrium effects are bigger in more unequal economies, increasing the benefits of a move to a nation-wide policy decision level. Finally, if the states are heterogeneous, there are also efficiency gains from equating education expenditures across students. And a move from community- to state-wide public funding of education can raise the steadyÜstate output and welfare levels. In the first place there are efficiency gains from equating spending per student in the presence of heterogeneity as in Fernandez and Rogerson (1994). In the second place, moving to a stateÜwide financing of education widens the tax base and increases the return to each parent's contribution.