Paid or free tertiary education? Investment in human capital and the role of family

1. Paid or free tertiary education?
Investment in human capital and the role of family
Sylwia Radomska
GRAPE, University of Warsaw

2. Motivation
2
Source: W Lutz, A Goujon, S K.C., W Sanderson. Reconstruction of population by age, sex and level of educational
attainment of 120 countries for 1970-2000. Vienna Yearbook of Population Research, vol. 2007
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
France Germany Japan Poland Republic of Korea United Kingdom United States of
America
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Young people (age 25-30) with higher education

3. Motivation
o Education is a public/merit good: prone to inefficiencies:
o Externalities
o Imperfet informations about future benefits
o ”Einsteins lost”
o Overinvestment in people with low ability
o Investment in human capital important for economy
o Macroeconomic perspective
o Education -> labor productivity -> income & output
o Increase GDP, technology progress
o Microeconomic perspective
o Earnings, status
3

4. Family funding vs. Public funding
4
Source: OECD (2020), Spending on tertiary education (indicator)
0
10
20
30
40
50
60
70
80
90
HH PUB HH PUB HH PUB
DEU POL USA
2000
2005
2008
2009
2010
2011
2012
2013
2014
2015
2016

5. Research question
How to finance the investment in human capital in an optimal and
socially (politically) acceptable way?
5
o Laissez-faire (US)
o Student credit defaults: 6% of GDP!
Alternatives to consider
o Education subsidy (Europe)
o All citizens pay, a small fraction benefits
Benabou, 2002; Krueger & Ludwig, 2016, Koeniger & Prat, 2018
o Smoothing the cost of financing (USA)
o Helps to accommodate e.g. job loss
Bobo & Trannoy, 2015; Findeisen & Sachs, 2016; Stancheva, 2017

6. Implications for MACRO – state of the art
6
smoothing the cost of financing + education subsidies
Authors Life cycle model Dynasties OLG Shocks Heterogeneity
Bobo &
Trannoy
Findeisen &
Sachs
Stancheva
Benabou
Bovenberg &
Jacobs
Kruger &
Ludwig
Koeniger &
Prat

7. How parents influence teenangers’ college decisions?
7
Source: Data The High School Longitudinal Study Of 2009 (HSLS:09)

8. How parents influence teenangers’ college decisions?
8
Source: Data The High School Longitudinal Study Of 2009 (HSLS:09)

9. How parents influence teenangers’ college decisions?
9
Source: Data The High School Longitudinal Study Of 2009 (HSLS:09)

10. How parents influence teenangers’ college decisions?
10
Source: Data The High School Longitudinal Study Of 2009 (HSLS:09)

11. Methodology – introduction of family in OLG
11
o Overlapping generations model (OLG) with
o ex ante heterogenous agents - differ in their abilities 𝜃
o family structure (parents may invest into the schooling of their
children and derive utility from the human capital of their children)
max 𝑙𝑛𝑐𝑡
𝑚
+ 𝜙 ln 1 − 𝑙 𝑡
𝑚
+ 𝝑𝒍𝒏𝒉 𝒕+𝟏
.
s.to. 𝑐𝑡
𝑚
+ 𝒆 𝒕 = (𝟏 − 𝜏)𝑤𝑡(𝜃𝑖,𝑡, ℎ𝑖,𝑡)𝑙 𝑡
𝑚
ℎ 𝑡+1 = (𝜃 + 𝑋𝑡 + 𝑏𝒆 𝒕) 𝜂
𝒉𝒕
𝝉 തℎ 𝑡
𝜅
(human capital accumulation)

12. Preliminary outcomes
Both higher public expenditures and parents altruisitc
motive increase the aggregated level of human capital
in society.
12

13. Preliminary outcomes
Parental altruism reduce the elasticity of labor supply
13

14. Summary
o Investment in human capital important from microeconomic and
macroeconomic perspective
o Parents influence the childrens’ college decisions
o Government intervension – the solution for market failures?
14

15. Bibliography
15
o Scott-Clayton, J. (2018). The Looming Student Loan Default Crisis Is Worse than We Thought. Evidence
Speaks Reports, Vol 2,# 34. Center on Children and Families at Brookings
o Mirrlees, J. A. (1971). An exploration in the theory of optimum income taxation. The review of economic
studies, 38(2), 175-208.
o Mirrlees, J. A. (1976). The optimal structure of incentives and authority within an organization. The Bell
Journal of Economics, 105-131.
o Mirrlees, J. A. (1986). The theory of optimal taxation. Handbook of mathematical economics, 3, 1197-
1249.
o Kocherlakota, N. R. (2010). The new dynamic public finance. Princeton University Press.
o Friedman, M. (1955). The role of government in education. In Economics and the Public Interest (pp.
123-144). New Brunswick, NJ: Rutgers University Press
o Findeisen, S., & Sachs, D. (2016). Education and optimal dynamic taxation: The role of income-
contingent student loans. Journal of Public Economics, 138, 1-21.
o Stantcheva, S. (2017). Optimal taxation and human capital policies over the life cycle. Journal of Political
Economy, 125(6), 1931-1990.
o Koeniger, W., & Prat, J. (2018).Human capital and optimal redistribution. Review of Economic Dynamics,
27, 1-26.
o Benabou, R. (2002). Tax and education policy in a heterogeneous‐agent economy: What levels of
redistribution maximize growth and efficiency? Econometrica, 70(2), 481-517.
o Krueger, D., & Ludwig, A. (2016). On the optimal provision of social insurance: Progressive taxation
versus education subsidies in general equilibrium. Journal of Monetary Economics, 77, 72-98.