Insuring Educational Risk: Opportunities versus Income

48 Pages Posted: 14 Jul 2008

See all articles by Dirk Schindler

Dirk Schindler

Erasmus School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Benjamin Weigert

University of Giessen - Department of Economics

Date Written: July 2008

Abstract

We develop a model of education where individuals face educational risk. Successfully entering the skilled labor sector depends on individual effort in education and public resources, but educational risk still causes (income) inequality. We show that an optimal public policy consists of deferred skill-specific tuition fees, lump-sum transfers/taxes, and public funding of the educational sector. We argue that improved educational opportunities matter more than direct income transfers in a Second-best setting. Contrary to standard models of income risk, it is not optimal to use a proportional wage tax, because combining skill-specific tuition fees and public education spending provide both insurance and redistribution at lower costs. A wage tax is only optimal if skill-specific tuition fees are not available.

Keywords: human capital investment, endogenous risk, learning effort, optimal taxation, public education

JEL Classification: H21, I2, J2

Suggested Citation

Schindler, Dirk and Weigert, Benjamin, Insuring Educational Risk: Opportunities versus Income (July 2008). CESifo Working Paper Series No. 2348, Available at SSRN: https://ssrn.com/abstract=1159679 or http://dx.doi.org/10.2139/ssrn.1159679

Dirk Schindler (Contact Author)

Erasmus School of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Benjamin Weigert

University of Giessen - Department of Economics ( email )

Licher Str. 62
Giessen, Hessen D-35394
Germany

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