A General Equilibrium Theory of College with Education Subsidies, In-School Labor Supply, and Borrowing Constraints

Carlos Garriga () and Mark P. Keightley ()
Additional contact information
Mark P. Keightley: Florida State University

No 2013-002, Working Papers from Human Capital and Economic Opportunity Working Group

Abstract: This paper analyzes the effectiveness of three different types of education policies: tuition subsidies (broad based, merit based, and flat tuition), grant subsidies (broad based and merit based), and loan limit restrictions. We develop a quantitative theory of college within the context of general equilibrium overlapping generations economy. College is modeled as a multi-period risky investment with endogenous enrollment, time-to-degree, and dropout behavior. Tuition costs can be financed using federal grants, student loans, and working while at college. We show that our model accounts for the main statistics regarding education (enrollment rate, dropout rate, and time to degree) while matching the observed aggregate wage premiums. Our model predicts that broad based tuition subsidies and grants increase college enrollment. However, due to the correlation between ability and financial resources most of these new students are from the lower end of the ability distribution and eventually dropout or take longer than average to complete college. Merit based education policies counteract this adverse selection problem but at the cost of a muted enrollment response. Our last policy experiment highlights an important interaction between the labor-supply margin and borrowing. A significant decrease in enrollment is found to occur only when borrowing constraints are severely tightened and the option to work while in school is removed. This result suggests that previous models that have ignored the student's labor supply when analyzing borrowing constraints may be insufficient.

Keywords: Student Loans; Education Subsidies; Higher Education (search for similar items in EconPapers)
JEL-codes: E0 H52 H75 I22 J24 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-dge, nep-edu and nep-mac
Note: M
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://humcap.uchicago.edu/RePEc/hka/wpaper/Garrig ... 3_Education_v11b.pdf First version, November, 2007 (application/pdf)
http://research.stlouisfed.org/wp/2007/2007-051.pdf

Related works:
Working Paper: A General Equilibrium Theory of College with Education Subsidies, In-School Labor Supply, and Borrowing Constraints (2009)
Working Paper: A general equilibrium theory of college with education subsidies, in-school labor supply, and borrowing constraints (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hka:wpaper:2013-002

Access Statistics for this paper

More papers in Working Papers from Human Capital and Economic Opportunity Working Group Contact information at EDIRC.
Bibliographic data for series maintained by Jennifer Pachon ().