Human capital accumulation and private-public investment into higher education

9 Pages Posted: 17 Nov 2023

See all articles by Kadri Männasoo

Kadri Männasoo

Tallinn University of Technology (TUT)

Date Written: October 21, 2023

Abstract

This paper proposes an application for simulation of higher education investment for the government and for a representative individual. Both maximize their present value returns over two periods. In the first period, investment into human capital accumulation increases individual productivity. In the second period, the individual earns revenues and government collects taxes. In a joint system, the individual chooses the optimal study time in semesters and the government seeks for its optimal share of funding. Varying the parameter values for the discount rate and graduate wage bonus, the simulation presents several interactions. The results show that government revenues are more sensitive upon changes in graduate wage bonus and discount rate compared to the private revenues for the individual. Higher graduate wage bonus and lower discount rate encourage individuals’ investment in their human capital in the first period meaning trade off in their first period revenues against higher earnings in the second period. The gains for the government from the increased wage bonus or from the lower discount rate are twofold: individuals’ higher incentives to accumulate human capital reduce government share of higher education funding and generate larger tax revenues accrued on increased human capital output.

Keywords: human capital accumulation, returns to higher education, intertemporal choice, government expenditures on higher education, simulation based static optimization

JEL Classification: J24, I26, D15, H52

Suggested Citation

Männasoo, Kadri, Human capital accumulation and private-public investment into higher education (October 21, 2023). Available at SSRN: https://ssrn.com/abstract=4609044 or http://dx.doi.org/10.2139/ssrn.4609044

Kadri Männasoo (Contact Author)

Tallinn University of Technology (TUT) ( email )

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