Liquidity Constraints, Fiscal Externalities and Optimal Tuition Subsidies†

Liquidity Constraints, Fiscal Externalities and Optimal Tuition Subsidies† AbstractA large literature focuses on two important rationales for government subsidies to college students: positive fiscal externalities from a larger tax base, and liquidity constraints. This paper provides a first attempt to gauge the relative importance of these mechanisms. I use US data in combination with two modeling approaches: calibration of a simple structural model of human capital accumulation, and a ”sufficient statistics” approach. The resulting optimal subsidies are larger than median public tuition by about $3,000 per year. This finding is driven by fiscal externalities; optimal tuition subsidy policy is not sensitive to the extent of liquidity constraints. (JEL H52, H75, I22, I23, I28) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Economic Policy American Economic Association

Liquidity Constraints, Fiscal Externalities and Optimal Tuition Subsidies†

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
1945-7731
D.O.I.
10.1257/pol.20150079
Publisher site
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Abstract

AbstractA large literature focuses on two important rationales for government subsidies to college students: positive fiscal externalities from a larger tax base, and liquidity constraints. This paper provides a first attempt to gauge the relative importance of these mechanisms. I use US data in combination with two modeling approaches: calibration of a simple structural model of human capital accumulation, and a ”sufficient statistics” approach. The resulting optimal subsidies are larger than median public tuition by about $3,000 per year. This finding is driven by fiscal externalities; optimal tuition subsidy policy is not sensitive to the extent of liquidity constraints. (JEL H52, H75, I22, I23, I28)

Journal

American Economic Journal: Economic PolicyAmerican Economic Association

Published: Nov 1, 2017

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