Education Policy and Intergenerational Transfers in Equilibrium

115 Pages Posted: 16 Jul 2018

See all articles by Brant Abbott

Brant Abbott

Queen's University - Department of Economics

Giovanni Gallipoli

Vancouver School of Economics, UBC; Centre for Economic Policy Research (CEPR); University of Chicago - Becker Friedman Institute for Economics; Rimini Centre for Economic Analysis

Costas Meghir

Yale University; Yale University - Cowles Foundation; Institute for Fiscal Studies (IFS); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Giovanni L. Violante

New York University, Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: May 15, 2018

Abstract

This paper examines the equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life cycle model with education, labor supply, and consumption/saving decisions. Cognitive and non-cognitive skills of children depend on the cognitive skills and education of parents, and affect education choice and labor market outcomes. Driven by both altruism and paternalism, parents make transfers to their children which can be used to fund education, supplementing grants, loans and the labor supply of the children themselves during college. The crowding out of parental transfers by government programs is sizable and thus cannot be ignored when designing policy. The current system of federal aid is valuable: removing either grants or loans would each reduce output by 2% and welfare by 3% in the long-run. An expansion of aid towards ability-tested grants would be markedly superior to either an expansion of student loans or a labor tax cut. This result is, in part, due to the complementarity between parental education and ability in the production of skills of future.

Keywords: Ability Transmission, Altruism, Credit Constraints, Education, Equilibrium, Financial Aid, Intergenerational Transfers, Paternalism

JEL Classification: E24, I22, J23, J24

Suggested Citation

Abbott, Brant and Gallipoli, Giovanni and Meghir, Costas and Violante, Giovanni L., Education Policy and Intergenerational Transfers in Equilibrium (May 15, 2018). Cowles Foundation Discussion Paper No. 1887R2. Available at SSRN: https://ssrn.com/abstract=3206752 or http://dx.doi.org/10.2139/ssrn.3206752

Brant Abbott

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada

Giovanni Gallipoli

Vancouver School of Economics, UBC ( email )

6000 Iona drive
Vancouver, BC BC V6T 1L4
Canada

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Chicago - Becker Friedman Institute for Economics ( email )

Chicago, IL 60637
United States

Rimini Centre for Economic Analysis ( email )

Rimini
Italy

Costas Meghir (Contact Author)

Yale University ( email )

37 Hillhouse avenue
New Haven, CT CT 06511
United States
+12034323558 (Phone)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

Giovanni L. Violante

New York University, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-992-9771 (Phone)
212-995-4186 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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