Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/51827
Authors: 
McKenzie, Tom
Sliwka, Dirk
Year of Publication: 
2010
Series/Report no.: 
Discussion paper series // Forschungsinstitut zur Zukunft der Arbeit 5330
Abstract: 
We examine ways of funding higher education, comparing upfront tuition fees with graduate taxes. The tax dominates, as volatility in future income is transferred from risk-averse students to the risk-neutral state. However, a double moral hazard problem arises when students' efforts to raise lifetime income and universities' activities to improve teaching quality are endogenized. We show that graduate taxes reduce work incentives but provide incentives to improve teaching quality. Yet if tax revenues are distributed evenly among universities there is free riding. To solve this problem each university should be allocated the revenue generated by its own alumni. In addition, we demonstrate how a budget-balancing graduate tax would encourage more people to attend university than would the equivalent upfront tuition fee.
Subjects: 
higher education
graduate tax
tuition fees
risk aversion
incentives
JEL: 
H42
H52
I22
M52
Document Type: 
Working Paper

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