Abstract
Measuring the incidence of public spending in education requires an intergenerational framework distinguishing between what current and future generations—that is, parents and children—give and receive. In standard distributional incidence analysis, households are assumed to receive a benefit equal to what is spent on their children enrolled in the public schooling system and, implicitly, to pay a fee proportional to their income. We show that, in an intergenerational framework, this is equivalent to assuming perfectly altruistic individuals, in the sense of the dynastic model, and perfect capital markets. But in practice, credit markets are imperfect and poor households cannot borrow against the future income of their children. We show that under such circumstances, standard distributional incidence analysis may greatly over-estimate the progressivity of public spending in education: educational improvements that are progressive in the long-run steady state may actually be regressive for the current generation of poor adults. This is especially true where service delivery in education is highly inefficient—as it is in poor districts of many developing countries—so that the educational benefits received are relatively low in comparison with the cost of public spending. Our results have implications for both policy measures and analytical approaches.
Highlights
Measuring the incidence of public spending in education requires an intergenerational framework distinguishing between what current and future generations – that is, parents and children – give and receive
The total public cost of education and health services is imputed proportionally to the number of users – the number of children attending school, for example, or the number of people having access to health care units. This was the approach taken in the first studies of the distributional incidence of public spending by Meerman (1979) and Selowski (1979
This paper focuses on another aspect of social public spending that incidence analysis has not handled explicitly: the inter-temporal or intergenerational nature of the effects of many of these expenditures
Summary
To make the exposition as simple as possible, we consider here an elementary model of demand for education by parents for their children, which is a direct application of the dynastic model first introduced by. Consider the stationary case where the basic level of earnings and taxes is (or at least is expected to be) constant over time, with values w and T This yields the following simple dynamics of wealth and consumption for the whole dynasty: ct = c* = r.b0 + (w − T ) bt = b0 for all t ≥ 0. The optimal consumption path for each generation consists of spending its current earnings (net of taxes) plus the returns on inherited wealth; this path keeps the level of wealth unchanged across generations.8 Within this extremely simplified framework, consider the effect of a permanent exogenous improvement in the quality of compulsory public schooling that increases w.
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