Type of Publication: | Working Paper/Technical Report |
Author: | Schindler, Dirk; Weigert, Benjamin |
Year of publication: | 2011 |
Series: | CESifo Working Paper;3436 |
Summary: |
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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JEL Classification: | H210, I200, J200 |
Subject (DDC): | 330 Economics |
Keywords: | human capital investment, endogenous risk, learning effort, optimal taxation, public education |
Bibliography of Konstanz: | Yes |
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SCHINDLER, Dirk, Benjamin WEIGERT, 2011. Shutting the stable door after the horse has bolted? : on educational risk and the quality of education
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