Universities as Stakeholders in Their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education

19 Pages Posted: 29 Nov 2010

See all articles by Tom McKenzie

Tom McKenzie

University of Dundee - Department of Economic Studies

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management; IZA Institute of Labor Economics

Abstract

We examine ways of funding higher education, comparing upfront tuition fees with graduate taxes. The tax dominates, as volatility in future income is transferred from risk-averse students to the risk-neutral state. However, a double moral hazard problem arises when students' efforts to raise lifetime income and universities' activities to improve teaching quality are endogenized. We show that graduate taxes reduce work incentives but provide incentives to improve teaching quality. Yet if tax revenues are distributed evenly among universities there is free riding. To solve this problem each university should be allocated the revenue generated by its own alumni. In addition, we demonstrate how a budget-balancing graduate tax would encourage more people to attend university than would the equivalent upfront tuition fee.

Keywords: higher education, graduate tax, tuition fees, risk aversion, incentives

JEL Classification: H42, H52, I22, M52

Suggested Citation

McKenzie, Tom and Sliwka, Dirk, Universities as Stakeholders in Their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education. IZA Discussion Paper No. 5330. Available at SSRN: https://ssrn.com/abstract=1716125

Tom McKenzie (Contact Author)

University of Dundee - Department of Economic Studies ( email )

Dundee, Scotland DD1 4HN
United Kingdom

Dirk Sliwka

University of Cologne - Department of Business Administration and Human Resource Management ( email )

Koln, 50923
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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