Universität zu Köln

Becker, Fabian (2019). Essays On the Optimal Interplay of Early and Late Education Subsidies and Taxation. PhD thesis, Universität zu Köln.

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Abstract

In this dissertation I have extended the model of Krueger and Ludwig (2013) and (2016) by (i) linking the prospect of successful college completion to human capital, (ii) introducing taste shocks in order to deal with potential issues caused by the discrete college choice and (iii) incorporating the human capital process during primary and secondary education. This results in a large-scale OLG model, that accounts for the core mechanisms of the human capital literature and allows for endogenous responses within the whole human capital process of primary, secondary and tertiary education, to changes in college subsidies and non-tertiary education investments by the government. By embedding this setup into a large-scale OLG environment, we were able to compare the different paths of impact of the policy measures in a realistic framework. In partial equilibrium, non-tertiary education investments and college subsidies deviate regarding their distributional consequences. Both measures increase average human capital, which leads to higher aggregate production and consumption. However, while primary and secondary education expenses of the government increase the human capital level for children from all household types, college subsidies do not increase the human capital investments from education and income-poor parents, which leads to an increase of inequality. When wages respond to shifts in the labor market, both policy measures increase equality. This is accomplished by an endogenous decrease in the college wage premium, which lowers the return on parental human capital investments. The key difference between the two measures is, that while both policy instruments result in a more equal distribution of human capital, non-tertiary investments of the government compensate for the decreased human capital expenditures of parents and shift average human capital to a higher level. The bivariate experiments underline the interdependence of the two policy measures. Benefits of college subsidies can only be claimed if young adults have the skills to successfully complete college. Early human capital investments remain unused, if college education can only be afforded by a small fraction in the population. In all experiments we have performed, the best policy mix calls for an increase in primary, secondary and tertiary education investments by the government, financed by higher labor taxes relative to the current status quo.