Borrowing Constraints, College Aid, and Intergenerational Mobility

48 Pages Posted: 14 Sep 2004

See all articles by Eric A. Hanushek

Eric A. Hanushek

Stanford University - Hoover Institution on War, Revolution and Peace; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Charles Ka Yui Leung

The Chinese University of Hong Kong (CUHK) - Department of Economics

Kuzey Yilmaz

Koc University - Department of Economics

Date Written: August 2004

Abstract

The current level and form of subsidization of college education is often rationalized by appeal to capital constraints on individuals. Because borrowing against human capital is difficult, capital constraints can lead to nonoptimal outcomes unless government intervenes. We develop a simple dynamic general equilibrium model of the economy that permits us to explore the impact of alternative ways of subsidizing higher education. The key features of this model include endogenously determined bequests from parents that can be used to finance schooling, uncertainty in college completion related to differences in ability, and wage determination based upon the amount of schooling in the economy. Because policies toward college lead to large changes in schooling, it is very important to consider the general equilibrium effects on wages. Within this structure, we analyze tuition subsidies such as exist in most public colleges, alternative forms of need-based aid, income contingent loans, and merit-based aid. Each of these policies tends both to improve the efficiency of the economy while yielding more intergenerational mobility and greater income equality. But, the various policies have quite different implications for societal welfare, and the underlying subsidy patterns vary widely.

Suggested Citation

Hanushek, Eric A. and Leung, Ka Yui Charles and Yilmaz, Kuzey, Borrowing Constraints, College Aid, and Intergenerational Mobility (August 2004). NBER Working Paper No. w10711. Available at SSRN: https://ssrn.com/abstract=583427

Eric A. Hanushek (Contact Author)

Stanford University - Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States
650-736-0942 (Phone)
650-723-1687 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ka Yui Charles Leung

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong
+852-2609-7158 (Phone)
+852-2603-5805 (Fax)

HOME PAGE: http://www.cuhk.edu.hk/eco/staff/kyleung

Kuzey Yilmaz

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910, Istanbul
Turkey

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