When is the Efficient Subsidy to Higher Education the Equitable Subsidy ?
Despite some empirical evidence to the contrary, government subsidy to higher education is usually presumed to be inequitable because college-educated workers earn more than less educated workers. Using a simple model of edu- cational choice with endogenous wages and two worker types, I obtain strong results concerning this conßict between efficiency and equity ? namely that eq- uity and efficiency do not conßict unless there are borrowing constraints. Pre- existing distorting taxes or real externalities imply that the efficient subsidy is positive and that the efficient subsidy is also the subsidy which maximizes the net income of the unskilled. However, when tuition subsidies are used to overcome borrowing constraints, the efficient subsidy exceeds the subsidy which maximizes the net income of the unskilled. If borrowing constraints could be overcome with another policy, like student loans, efficiency and equity would not be in conßict. In a more complex model with a range of worker abilities there is no equity-efficiency trade-off only when the efficient subsidy is zero ? that is, in the absence of real externalities, pre-existing taxes or borrowing constraints. The presence of any one of these three complications makes the efficient subsidy positive, while the subsidy that maximizes the net income of the unskilled is lower. In those cases, efficiency conßicts with equity.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Johnson, George E, 1984. "Subsidies for Higher Education," Journal of Labor Economics, University of Chicago Press, vol. 2(3), pages 303-318, July.
- Moretti, Enrico, 2004.
"Estimating the social return to higher education: evidence from longitudinal and repeated cross-sectional data,"
Journal of Econometrics,
Elsevier, vol. 121(1-2), pages 175-212.
- Enrico Moretti, 2002. "Estimating the Social Return to Higher Education: Evidence From Longitudinal and Repeated Cross-Sectional Data," NBER Working Papers 9108, National Bureau of Economic Research, Inc.
- Keane, Michael P & Wolpin, Kenneth I, 1997.
"The Career Decisions of Young Men,"
Journal of Political Economy,
University of Chicago Press, vol. 105(3), pages 473-522, June.
- James J. Heckman & Lance Lochner & Christopher Taber, 1999. "General Equilibrium Cost Benefit Analysis of Education and Tax Policies," NBER Working Papers 6881, National Bureau of Economic Research, Inc.
- Daron Acemoglu & Joshua Angrist, 1999.
"How Large are the Social Returns to Education? Evidence from Compulsory Schooling Laws,"
NBER Working Papers
7444, National Bureau of Economic Research, Inc.
- Daron Acemoglu & Joshua Angrist, 1999. "How Large are the Social Returns to Education? Evidence from Compulsory Schooling Laws," Working papers 99-30, Massachusetts Institute of Technology (MIT), Department of Economics.
- Philip A. Trostel, 1996. "Should Education Be Subsidized?," Public Finance Review, , vol. 24(1), pages 3-24, January.
When requesting a correction, please mention this item's handle: RePEc:vir:virpap:366. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Debby Stanford)
If references are entirely missing, you can add them using this form.