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Inequality in Parental Transfers, Borrowing Constraints and Optimal Higher Education Subsidies

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  • Youngmin Park
Abstract
This paper studies optimal education subsidies when parental transfers are unequally distributed across students and cannot be publicly observed. After documenting substantial inequality in parental transfers among US college students with similar family resources, I examine its implications for how the education subsidy should vary with schooling level and family resources to minimize inefficiencies generated by borrowing constraints. Unobservable heterogeneity in parental transfers creates a force to heavily subsidize low schooling levels chosen by borrowingconstrained students with low parental transfers. This force is stronger for rich families, but it is weakened if heterogeneity in returns to schooling also leads to different schooling choices. These mechanisms are quantified using a calibrated model. Quantitative analysis suggests a reform that reallocates public spending toward the first two years of college. The reform also reduces the gap in subsidy amounts by parental income during early years of college.

Suggested Citation

  • Youngmin Park, 2019. "Inequality in Parental Transfers, Borrowing Constraints and Optimal Higher Education Subsidies," Staff Working Papers 19-7, Bank of Canada.
    • Handle: RePEc:bca:bocawp:19-7
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    Cited by:

    1. Rim Lahmandi-Ayed & Hejer Lasram & Didier Laussel, 2020. "Is partial privatization of universities a solution for higher education? A successive monopolies model," Working Papers hal-02988323, HAL.
    2. Elizabeth M. Caucutt & Lance Lochner & Joseph Mullins & Youngmin Park, 2020. "Child Skill Production: Accounting for Parental and Market-Based Time and Goods Investments," NBER Working Papers 27838, National Bureau of Economic Research, Inc.
    3. Rim Lahmandi‐Ayed & Hejer Lasram & Didier Laussel, 2021. "Is partial privatization of universities a solution for higher education?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(6), pages 1174-1198, December.

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    More about this item

    Keywords

    Fiscal Policy; Potential output; Productivity;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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