This paper examines how socioeconomic stratification and alternative systems of education finance affect inequality and growth. Agents interact through local public goods or externalities (school funding, neighborhood effects) and economywide linkages (complementary skills, knowledge spillovers). Sorting families into homogeneous communities often minimizes the costs of existing heterogeneity but mixing reduces heterogeneity faster. Integration, therefore, tends to slow down growth in the short run yet raise it in the long run. A move to state funding of education presents society with a similar intertemporal trade-off. Local and global complementarities play major roles in determining the efficient social and educational structures.
Standard models of public education provision predict an implicit transfer of resources from higher-income individuals toward lower-income individuals. Many studies have documented that public higher education involves a transfer in the reverse direction. We show that this pattern of redistribution is an equilibrium outcome in a model in which education is only partially publicly provided and individuals vote over the extent to which it is subsidized. We characterize economies in which poorer individuals are effectively excluded from obtaining an education and their tax payments help offset the cost of education obtained by others. We show that increased inequality in the income distribution makes this outcome more likely.
In this paper, the authors present an overlapping generations model with heterogeneous agents in which human capital investment through formal schooling is the engine of growth. The authors use simple functional forms for preferences, technologies, and income distribution to highlight the distinction between economies with public education and those with private education. The authors find that income inequality declines more quickly under public education. On the other hand, private education yields greater per capita incomes unless the initial income inequality is sufficiently high. The authors also find that societies will choose public education if a majority of agents have incomes below average.
In most countries, the government is the main provider of education services. Even when a private education sector exists, it is often subsidized. Given the substantial involvement of governments in the education sector and the importance of skili acquisition for individual and national welfare, understanding how societies allocate public resources for education is a crucial issue. The purpose of this chapter is to review positive models of public funding for education. Models reviewed in this chapter consist of a private layer and a political economy layer. In the private layer, firms and households make their decisions taking as given the public policies. In the political economy layer, voters or groups with conflicting interests determine the public policy, taking into account the private sector response to the policy. The questions addressed by the models in this chapter include: What is the majority preferred level of funding for public education when private options are available? How do various dimensions of househoid heterogeneity (e.g., income, age, ability, tastes) alter the political equilibrium? What is the level of public funding in each community when households can sort themselves into multiple communities? Why are large-scale vouchers in education so rare across the world? Why are public education expenditures as a fraction of GDP rising along the development path? The focus of this chapter is theory, but calibrated versions of the theory that rely on empirical work are also included. We also review the empirical evidence that has bearing on the theoretical models in this chauter.
Key paper which applies median voter theorem to educational issues.
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