Education: optimal choice and efficient policy

Abstract

This paper argues that it suffices to assume distortionary wage taxation to prove the efficiency of effective subsidization of education. The paper does not rely on considerations of equity and market failure to justify subsidies. Instead, the optimal subsidy reduces the social cost of distortive wage taxation. The theoretical approach assumes a Mincer-type earnings function, analyzes corner solutions of optimal schooling choice and derives the result of efficient subsidization in a Ramsey-type framework. Second-best policy is confronted with empirical evidence from OECD countries. The majority of countries are shown to subsidize tertiary education in effective terms.