Risky Higher Education and Subsidies

FRB Richmond Working Paper No. 03-2

46 Pages Posted: 3 Dec 2012

See all articles by Ahmet Akyol

Ahmet Akyol

York University

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: August 12, 2003

Abstract

Tertiary education in the U.S. requires large investments that are risky, lumpy, and well-timed. Tertiary education is also heavily subsidized. By making the risk of human capital investment more acceptable, especially to low wealth households, subsidies may increase investment in human capital, lower long-run inequality, and reduce aggregate precautionary savings. However, subsidies also encourage more poorly prepared students to attend and are usually financed via distortionary taxes. In this paper, we find that observed collegiate subsidies improve welfare substantially relative to the fully decentralized (zero subsidy) outcome. We show that subsidies help smooth consumption, lower skill premia, increase interest rates as precautionary savings fall, lower the inequality of both consumption and wealth, increase intergenerational income mobility and raise welfare, even when financed by distortionary taxes.

Keywords: human capital risk, heterogeneous agents, college education

JEL Classification: E60, I22

Suggested Citation

Akyol, Ahmet and Athreya, Kartik, Risky Higher Education and Subsidies (August 12, 2003). FRB Richmond Working Paper No. 03-2, Available at SSRN: https://ssrn.com/abstract=2184522 or http://dx.doi.org/10.2139/ssrn.2184522

Ahmet Akyol (Contact Author)

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
20
Abstract Views
1,035
PlumX Metrics