Public versus Private Education with Risky Human Capital

37 Pages Posted: 20 Dec 2009

Date Written: December 1, 2009

Abstract

This paper studies the long-run macroeconomic, distributional and welfare effects of tuition policy and student loans. We therefore form a rich model of risky human capital investment based on the seminal work of Heckman, Lochner and Taber (1998). We extend their original model by variable labor supply, borrowing constraints, idiosyncratic wage risk, uncertain life-span, and multiple schooling decisions. This allows us to build a direct link between students and their parents and make the initial distribution of people over different socio-economic backgrounds endogenous. Our simulation indicate that privatization of tertiary education comes with a vast reduction in the number of students, an increase in the college wage premium and longrun welfare losses of around 5 percent. Surprisingly, we find that from privatization of tertiary education, students are better off compared to workers from other educational classes, since the college wage premium nearly doubles. In addition, our model predicts that income contingent loans on which students don’t have to pay interest, improve the college enrolment situation for agents from all kinds of backgrounds.

Keywords: public vs. private education, schooling choice, human capital investment, idiosyncratic uncertainty

JEL Classification: I22, J24, H52

Suggested Citation

Kindermann, Fabian, Public versus Private Education with Risky Human Capital (December 1, 2009). SOEPpaper No. 246, Available at SSRN: https://ssrn.com/abstract=1524232 or http://dx.doi.org/10.2139/ssrn.1524232

Fabian Kindermann (Contact Author)

University of Regensburg ( email )

Universitaetsstrasse 31
D-93040 Regensburg
Germany

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands