Shutting the Stable Door After the Horse Has Bolted? On Educational Risk and the Quality of Education

29 Pages Posted: 18 May 2011

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: April 29, 2011

Abstract

We analyze whether a redistributive government should provide ex ante insurance against unfortunate outcomes or whether it should instead rely on transfers for redistributing income ex post. To this end, we develop a model of education in which individuals face educational risk and wage dispersion across two types of skills. Successful graduation and working as a skilled worker depends on individual effort in education and on public resources, but educational risk still causes (income) inequality. We show that in a second-best setting, in which learning effort is not observable, improving the quality of education by public funding of the educational sector has a significant effect and that this increases efficiency in comparison to a pure (linear) income tax with income transfers from skilled to unskilled workers. Compared to a first-best solution, providing ex ante insurance significantly gains importance relative to traditional ex post redistribution, because it simultaneously alleviates moral hazard in education. These results are strengthened when a (distortionary) skill-specific tax can be implemented.

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

JEL Classification: H210, I200, J200

Suggested Citation

Schindler, Dirk and Weigert, Benjamin, Shutting the Stable Door After the Horse Has Bolted? On Educational Risk and the Quality of Education (April 29, 2011). CESifo Working Paper Series No. 3436, Available at SSRN: https://ssrn.com/abstract=1837241 or http://dx.doi.org/10.2139/ssrn.1837241

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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