Shutting the stable door after the horse has bolted? : on educational risk and the quality of education

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Date
2011
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Weigert, Benjamin
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CESifo Working Paper;3436
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Abstract
We analyze whether a redistributive government should provide ex ante insurance against unfortunate outcomes or whether it should instead rely on transfers for redistributing income ex post. To this end, we develop a model of education in which individuals face educational risk and wage dispersion across two types of skills. Successful graduation and working as a skilled worker depends on individual effort in education and on public resources, but educational risk still causes (income) inequality. We show that in a second-best setting, in which learning effort is not observable, improving the quality of education by public funding of the educational sector has a significant effect and that this increases efficiency in comparison to a pure (linear) income tax with income transfers from skilled to unskilled workers. Compared to a first-best solution, providing ex ante insurance significantly gains importance relative to traditional ex post redistribution, because it simultaneously alleviates moral hazard in education. These results are strengthened when a (distortionary) skill-specific tax can be implemented.
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330 Economics
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human capital investment,endogenous risk,learning effort,optimal taxation,public education
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ISO 690SCHINDLER, Dirk, Benjamin WEIGERT, 2011. Shutting the stable door after the horse has bolted? : on educational risk and the quality of education
BibTex
@techreport{Schindler2011Shutt-18172,
  year={2011},
  series={CESifo Working Paper;3436},
  title={Shutting the stable door after the horse has bolted? : on educational risk and the quality of education},
  author={Schindler, Dirk and Weigert, Benjamin}
}
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