Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/75712
Authors: 
Dur, Robert A. J.
Teulings, Coenraad N.
Year of Publication: 
2001
Series/Report no.: 
CESifo Working Paper 592
Abstract: 
Should education be subsidized for the purpose of redistribution? The usual argument against subsidies to education above the primary level is that the rich take up most education, so a subsidy would increase inequality. We show that there is a counteracting effect: an increase in the stock of human capital reduces the return to human capital and, therefore, pre-tax income inequality decreases. We consider a Walrasian world with perfect capital and insurance markets. Hence, in the absence of a strive for redistribution, the market generates the efficient level of investment in human capital. When there is a demand for redistribution, the general equilibrium effects on relative wages might make a subsidy to education an ingredient of a second-best optimal redistribution policy. Stimulating human capital formation results in a compression of the wage distribution, and hence reduces the need for distortionary redistributive taxation. We also study the political viability of education subsidies.
Document Type: 
Working Paper

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