Abstract
AbstractThis paper argues that it suffices to assume distortionary wage taxation to prove the efficiency of effective subsidization of education. The paper does not rely on considerations of equity and market failure to justify subsidies. Instead, the optimal subsidy reduces the social cost of distortive wage taxation. The theoretical approach assumes a Mincer‐type earnings function, analyzes corner solutions of optimal schooling choice and derives the result of efficient subsidization in a Ramsey‐type framework. Second‐best policy is confronted with empirical evidence from OECD countries. The majority of countries are shown to subsidize tertiary education in effective terms.
Highlights
The traditional approach to modeling schooling choice relies on the assumption that individuals maximize the present value of lifetime earnings
I.e., the cost of foregone leisure exceeds the cost of foregone earnings, if utility is maximized at an upper corner solution
The methodological contribution refers to the modelling of schooling choice
Summary
The traditional approach to modeling schooling choice relies on the assumption that individuals maximize the present value of lifetime earnings. Appealing at first sight, the idea that the choice of schooling results from strict income maximizing behavior is challenged by the persuasive evidence of significant nonpecuniary returns and costs of education. Our approach is based on: (i) utility maximization rather than income maximization, (ii) the recourse to learning theory, and (iii) the shift in focus away from optimal choice of schooling towards the analysis of efficient education policy. Each of these components is well established in the literature; progress comes from combining the three, as we hope to convince the reader.
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