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Risky Higher Education and Subsidies ¤y

By Ahmet Akyol and Jel Classi…cation E

Abstract

Tertiary education in the U.S. requires large investments that are risky, lumpy, and well-timed. Tertiary education is also heavily subsidized. By making the risk of human capital investment more acceptable, especially to low wealth households, subsidies may increase investment in human capital, lower long-run inequality, and reduce aggregate precautionary savings. However, subsidies also encourage more poorly prepared students to attend and are usually …nanced via distortionary taxes. In this paper, we …nd that observed collegiate subsidies improve welfare substantially relative to the fully decentralized (zero subsidy) outcome. We show that subsidies help smooth consumption, lower skill premia, increase interest rates as precautionary savings fall, lower the inequality of both consumption and wealth, increase intergenerational income mobility and raise welfare, even when …nanced by distortionary taxes

Topics: Human Capital Risk, Heterogeneous Agents, College Education z
Year: 2003
OAI identifier: oai:CiteSeerX.psu:10.1.1.194.5899
Provided by: CiteSeerX
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