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Berthold U. Wigger is Associate Professor of Economics and Robert K. von Weizacker is Professor of Economics at the University of Mannheim. The authors wish to thank the Editor, Robert Flood, and two anonymous referees for their helpful comments.
See, for example, Ludeke (1996) and Heckman and Klenow (1998) for a discussion on positive externalities of higher education. It should be noted that modern growth theory a la Romer (1986) and Lucas (1988) is based on positive externalities from education to endogenize the economy’s rate of growth. See Wigger (2001) for internalization policies of such externalities
Most of the literature concerned with the relationship between income distribution and growth assumes some kind of capital market imperfection. See, for example, Galor and Zeira (1993), Perotti (1993), and Barham and others (1995), as well as the surveys by Perotti (1994) and Benabou (1996).
See Lott (1987) for a more in-depth survey of the normative justifications for subsidizing higher education. Trostel (1993, 1996) provides a further efficiency argument for educational subsidies relying on the notion that income taxation distorts the investment decision on education which, in turn, can be corrected by an education subsidy. In contrast to the arguments above, however, this constitutes a second-best argument for subsidizing education. It should be noted that there is an alternative strand of the economics of education literature which emphasizes a public choice perspective of public education financing rather than stressing efficiency arguments. This literature includes Peltzman (1973), Johnson (1984), and Fernandez and Rogerson (1995).
Already Becker (1964, p. 104) has pointed out that educational returns are characterized by a very high coefficient of variation. This observation is supported by more recent studies such as, for instance, Miller and Volker (1993). For a theoretical approach to educational risk see Levhari and Weiss (1974).
An example is the Higher Education Contribution Scheme, which was introduced in Australia in 1989. See Chapman (1997) for an economic analysis of this scheme.
The model could easily be extended by considering more than two outcomes of educational investments. This would not, however, affect the main results.
Further results are that the marginal tax rate imposed on the successful should be zero and the one imposed on the unsuccessful should be positive. These results are well known from the optimal taxation literature. For an analysis of insurance and optimal taxation see Varian (1980); for an analysis of public education and optimal taxation see Ulph (1977) and Hare and Ulph (1979).
This may be the case, for instance, if educational costs are linked to the employment of teachers.