Efficient Education Policy - A Second-Order Elasticity Rule

11 Pages Posted: 7 Mar 2010

See all articles by Wolfram F. Richter

Wolfram F. Richter

TU Dortmund University; CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

Date Written: February 1, 2010

Abstract

Assuming a two-period model with endogenous choices of labour, education, and saving, efficient education policy is characterized for a Ramsey-like scenario in which the government is constrained to use linear instruments. It is shown that education should be effectively subsidized if, and only if, the elasticity of the earnings function is increasing in education. The strength of second-best subsidization increases in the elasticity of the elasticity of the earnings function. This second-order elasticity rule extends the well-known Ramsey-Boiteux Inverse Elasticity Rule.

Keywords: endogenous choice of education, labour, and saving, second-best efficient taxation, linear instruments, finite periods, Ramsey’s Rule, Inverse Elasticity Rule

JEL Classification: H21, I28, J24

Suggested Citation

Richter, Wolfram F., Efficient Education Policy - A Second-Order Elasticity Rule (February 1, 2010). CESifo Working Paper Series No. 2969, Available at SSRN: https://ssrn.com/abstract=1563998 or http://dx.doi.org/10.2139/ssrn.1563998

Wolfram F. Richter (Contact Author)

TU Dortmund University ( email )

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Institute for the Study of Labor (IZA)

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