Education in a Heterogeneous-Agent Economy: Revisiting Transatlantic Differences

Abstract

I propose a novel heterogeneous-agent model featuring public and private education in the choice set of households, positive human capital externalities, and distortionary taxes for public education financing to study transatlantic differences in public versus private education investment, tax rates, and economic distributions. I show that exogenous tax differences alone can generate most of the observed transatlantic disparities in this model. I also demonstrate that this model can explain how either of the calibrated US and European tax regimes can gain public support due to the U shape of aggregate variables over taxes, as also seen in the data.