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Should we raise expenditure in basic education and reduce expenditure at college?

Should we raise expenditure in basic education and reduce expenditure at college?. Marisa Hidalgo Hidalgo Universidad Pablo de Olavide (Sevilla) Iñigo Iturbe-Ormaetxe Universidad de Alicante Lund, November 2. Public expenditure in education.

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Should we raise expenditure in basic education and reduce expenditure at college?

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  1. Should we raise expenditure in basic education and reduce expenditure at college? Marisa Hidalgo Hidalgo Universidad Pablo de Olavide (Sevilla) Iñigo Iturbe-Ormaetxe Universidad de Alicante Lund, November 2

  2. Public expenditure in education As a fraction of total expenditure in education 2002 data (Source: OECD in figures-2005 edition) Lund, November 2 2006

  3. Annual expenditure per student Expenditure in equivalent US dollars adjusted using PPPs, 2002 (Source: OECD in figures, 2005 edition) Lund, November 2 2006

  4. Education levels • Primary and secondary education (basic education) • Strong positive externalities • Compulsory • Expenditure does not affect enrolment, but quality • Provides “general” human capital • Tertiary education (college education) • Weaker externalities • High private returns • Non-compulsory • Expenditure affects both enrollment and quality • Provides “specific” human capital Lund, November 2 2006

  5. What do we do in this paper? • We explore a model with 2 levels of education. Each level has a different public funding structure • Basic education • Mandatory • Funded exclusively by the government • Provides a uniform endowment of human capital to all individuals Lund, November 2 2006

  6. What do we do in this paper? (2) • College education • Optional • Students can be required to finance partially their education • Public expenditure affects participation • Public spending has a stronger effect on high ability individuals (ability and expenditure are complements at that level) Lund, November 2 2006

  7. What do we do in this paper? (3) • Individuals decide whether or not to attend college by comparing lifetime income if they attend with lifetime income if they do not • There are borrowing constraints • The government has 3 instruments: (i) Per capita expenditure in basic education; (ii) Per capita expenditure in college education; (iii) The college subsidy • We determine the proportion of individuals attending college, together with a measure of average quality of college graduates Lund, November 2 2006

  8. What do we do in this paper? (4) • We explore how changes in the way government divides its budget between basic and college education affects the different objectives the government may have: total college attendance, average quality of college graduates, or total productivity in the economy. • We also assume that the government wants to prevent the exclusion of the poor and talented from college Lund, November 2 2006

  9. Overview of the results • If the government cares only for quality at college (average productivity of college graduates), it should simply raise per capita expenditure on basic education • If the government wants to increase quality at college but it does not want to exclude poor students, it should raise per capita expenditure on basic education and reduce per capita expenditure in higher education appropriately • If the government wants to increase both quality and attendance without excluding the poor, either it cannot do it or, if it can, it should raise per capita expenditure on basic education and reduce per capita expenditure in higher education Lund, November 2 2006

  10. Model • Individuals live 2 periods. In the first part of the first period, all attend basic education. In the second part of the first period (a fraction δ) they either go to college or get an unskilled job • In the second period all of them work: • As skilled if college • As unskilled if not • Individual characteristics: ability a  U[0,1] and income y  [0, ymax] Lund, November 2 2006

  11. Model (2) • cL, cH: expenditure per capita in basic and college education • College subsidy s, 0  s  1 • Government pays cL in full and the fraction scH. Students pay (1-s)cH • T: total budget for education (fixed) •  : Proportion of individuals attending college • Budget constraint of the government: cL + scH = T Lund, November 2 2006

  12. Model (3) Individual decision on college attendance • Only basic education (unskilled job) get wage cL • College education (skilled job) get wage cL + cH a • Attend college if: cL + cH a – cH(1-s)  (1+ δ) cL • Threshold value of ability â = 1 – s + δ cL / cH • We have 0 < â. Provided s > δ cL / cH, then â <1 • Cost of attending college is cH (1-s). Income must be above a threshold level ŷ = (1-) cH (1-s). Here  [0, 1] represents the “quality” of capital markets. Individuals can borrow at most the amount  cH (1-s) Lund, November 2 2006

  13. Model (4) • p(cH, s, ) is the proportion of individuals with income above ŷ • So, who attends college? Those with ability above â and income above ŷ. College attendance is, therefore:  = p(cH, s, )  (1-â) • College attendance rises with s and . It gets lower with cL. The effect of cH is a priori ambiguous, but it is expected to be positive in developed countries • Average productivity of college graduates: cL + cH ((1+ â)/2) • We focus on cL and cH , taking s as determined through the constraint Lund, November 2 2006

  14. Results • If we just care for raising â: Hold fixed cH and increase cL. The threshold â is a monotonically increasing function of cL. This affects positively average productivity of graduates as well • Problem with this policy: The subsidy gets lower, rising the income threshold ŷ excluding from college some highly talented but poor individuals. This policy has also a negative effect on college attendance. We face a trade-off between quality (productivity) and quantity (attendance) • To overcome this trade-off: Increase cL and, at the same time, decrease cH so as to hold constant s. As the subsidy remains constant, this policy does not increase the income threshold ŷ, while it increases productivity Lund, November 2 2006

  15. Results (2) cH Productivity A B Iso-subsidy lines cL Lund, November 2 2006

  16. Results (3) cH Productivity A B Iso-subsidy cL Lund, November 2 2006

  17. Results (4) • Now suppose we care for college quality and college attendance at the same time. Is there a way of improving both objectives at the same time? • This depends crucially on the relation between the slope of the iso-attendance lines and the iso-productivity lines. In any case, there are just two possibilities: Either reducing cH and increasing cL or just the opposite. • However, if we care also for preventing the exclusion from college of the poor and talented, only the first policy has the desired effect. Lund, November 2 2006

  18. Results (5) (This hurts the poor) cH Iso-attendance A Iso-subsidy Productivity cL Lund, November 2 2006

  19. Results (6) A Iso-attendance Iso-subsidy Productivity cL Lund, November 2 2006

  20. Results (7) A Iso-attendance Iso-subsidy Productivity cL Lund, November 2 2006

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