Welfare Implications of Public Education Spending Rules
Athens University of Economics and Business - Department of International and European Economic Studies
University of Glasgow - Department of Economics
Athens University of Economics and Business - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); University of Essex
December 1, 2008
CESifo Working Paper Series No. 2510
In this paper, we quantitatively assess the welfare implications of alternative public education spending rules. To this end, we employ a dynamic stochastic general equilibrium model in which human capital externalities and public education expenditures, financed by distorting taxes, enhance the productivity of private education choices. We allow public education spending, as share of output, to respond to various aggregate indicators in an attempt to minimize the market imperfection due to human capital externalities. We also expose the economy to varying degrees of uncertainty via changes in the variance of total factor productivity shocks. Our results indicate that, in the face of increasing aggregate uncertainty, active policy can significantly outperform passive policy (i.e. maintaining a constant public education to output ratio) but only when the policy instrument is successful in smoothing the growth rate of human capital.
Number of Pages in PDF File: 39
Keywords: education spending, growth, welfare
JEL Classification: A00, E60, E62
Date posted: January 9, 2009
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