Credit constraints, Commitments, and the Political Economy of Education and Redistribution

Abstract

I try to determine under which conditions the political process might lead low-skilled individuals to finance the education of higher-skilled individuals, while allowing for repayment of these transfers in the form of labor income redistribution. It can be seen that such a scheme would be socially profitable if some of the high-skilled agents are credit-constrained when young, and cannot borrow to finance their education. However, the fact that education transfers and income redistribution are not simultaneous, and that the latter cannot be pledged upon by high-skilled agents at the time when the size of the former is decided, is a big obstacle to such a scheme of transfers. So far, I have been able to fully derive the politico-economic equilibrium of this model in the simpler case where no agent is credit-constrained: the flows of public funds (education subsidies and labor income redistribution here) are shown to be dependent on the distribution of pre-education intrinsic abilities, the elasticity of labor supply to taxation, and the cost and returns to education. I also obtain that the labor income tax is too large compared to the normative benchmark, which requires that education subsidies offset part of the tax distortions on human capital accumulation. Partial results were also obtained in the case with credit constraints, and will be completed in the near future.