Public funding of higher education: Who gains, who loses?

• DOI: http://doi.org/10.1111/ijet.12176
• Author: Ana Balcão Reis
• Published date: 01 June 2020
• Date: 01 June 2020

doi: 10.1111/ijet.12176

Public funding of higher education: Who gains, who loses?

Ana Balc˜

ao Reis∗

This paper analyses the effects of public funding of higher education on individuals’ welfare,

taking into account the hierarchical nature ofthe education system and the fact that parents may

complement basic public education with private tutoring. Although public funding financed by

a proportional income tax increases access to higher education, some of the agents who gain

access lose in welfare terms. Moreover, it is shown that the marginal agent regarding access to

higher education would always prefer a pure private funding system in whichhe would not send

his offspring to higher education but would also not pay tuition fees or pay taxes.

Key wor ds educational finance, welfare, higher education

JEL classification I22, I28

Accepted 1 September 2017

1 Introduction

In 2013, public expenditure on higher education was 0.9% of gross domestic product (GDP) in

Colombia, 1.2% in Ghana, and 1.9% in Ethiopia.1For OECD countries in 2013, public expenditure

on higher education as a proportion of GDP was on average 1.1%, with a minimum of 0.6% for

Japan and a maximum of 1.9% for Estonia (OECD 2016). However, since the initial contribution of

Hansen and Weisbrod (1969), a consensus has built in the economic literature that public funding

of higher education implies a redistribution of income from the poor to the rich, or at least from the

ends (both poor and rich) to the middle.2This is mainly a consequence of the fact that students from

high-income families are more likely to receive higher education. On average, for OECD countries,

higher education participation rates are four times higher for a young person with at least one

parent who has a tertiary degree than for a young person whose parents have not receivedsecondar y

education. Thus, the large amounts governments all around the world spend on higher education

seem to imply a regressive redistribution.

This paper aims to study the effects of the public funding of higher education on the individual

welfare ofthe different agents, focusing on those agents whose decision to send their child to university

*Nova School of Business and Economics, NOVA University Lisbon, Canpus de Campolide, Lisboa, Portugal. Email:

abr@novasbe.pt

I acknowledgefinancial suppor t fromFEDER through the Fundac¸˜

aopar a a Ciˆ

encia e Tecnologiaunder grants PTDC/EGE-

ECO/122754/2010 and PTDC/IIM-ECO/6813/2014. I thank Tiago Neves Sequeira for many comments and suggestions.

I thank Nicholas Barr and the other participants in the Arne Ryde Symposium on “The Economics of Higher Education”

for their comments.

1http://databank.worldbank.org/data/reports.aspx?source=Education-Statistics-∼-All-Indicators

2Zhang (2008) studies the role of public education on incomeinequalit y,taking this assumption has her point of departure.

See also Barr (2004).

International Journal of Economic Theory XX (2018) 1–20 © IAET 1

International Journal of Economic Theory 16 (2020) 196–215 © 2018 IAET

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International Journal of Economic Theory

Public funding of higher education Ana Balc˜

ao Reis

or not depends on higher education funding policy.3To this end, I compare different levels of higher

education subsidies, taking into account the hierarchical nature of the education system and also the

fact that parents have the possibility to complement public education with private expenditure on

individual tutoring. This possibility seems to be relevant in many countries. According to the PISA

2009 dataset,4the percentage of 15-year-old students who have out-of-school lessons is, in the case

of mathematics, 70% for Brazil, 86% for Tunisia,and 48% on average in OECD countries. I establish

the characteristics of those agents whose welfare increases and those agents whose welfare decreases

with the public funding of higher education when public funding is financed by income taxes that

apply to the whole population.

Several authors have followed a political economy approach to study how the public funding

of higher education may be the result of the political process. Important examples are Creedy and

Franc¸ois (1990), Fern ´

andez and Rogerson (1995), and, more recently,Zhang (2008) and Gioacchino

and Sabani (2009). Here, instead, I follow the approach of Glomm and Ravikumar (2003); I take

policy as given and look at its implications.

Other authors have studied the impact of financial incentives on access to higher education.

Dynarski (2003) and Kane (2003), using data for the USA, found that decreasing the direct cost

of college increases higher education enrollment rates. More recently, Steiner and Wrohlich (2012),

using data for Germany, also found that increasing student financial aid in higher education would

have a positive impact on access.The model in this paper is consistent with these results, but its main

focus is the effect of this policy on the welfare of the different individuals.

Closer to the questions addressed in this paper, Caucutt and Kumar (2003) study the effects of

increasing higher education subsidies on inequality, welfare and efficiency. They solve their model

numerically for the US case and find that, when present, the aggregate welfare gain is minimal.

They also calculate the welfare gain for the two types of agents present in their model: poor (school

educated) and rich (college educated). In any of the policy alternatives studied, the rich lose and

the poor gain. This would indicate that subsidizing higher education benefits the poor, implying a

progressive redistribution. However, this is an aggregate measure for the whole class of poor parents,

obtained as an expected gain from the policy and without discriminating between those who send

their child to college and those who do not. In this paper, I calculate the welfare gain for each of

a continuum of different parents, distinguishing between those who decide to send and those who

decide not to send their child to university.I focus precisely on those whose decision depends on the

subsidy level. The simplicity of the model allows general analytical results to be obtained.

I take into account the hierarchical nature of the education system.This aspect is ver y important

for the study of higher education as it implies that only those that attain a minimum level of

basic education are able to go to university.5Access to higher education is always limited, and the

importance of early investments to attain the educational prerequisites required to accessuniversity

has been emphasized in the literature (Carneiro and Heckman 2003; Cunha et al. 2006; Caucutt and

Lochner 2012). For Australia, Cardak and Ryan (2009) found that what explains the socioeconomic

gap in participation in higher education is the gap in finishing secondary education or, for those

students who complete secondary education, the dependence of the secondary education final grade

on students’ socioeconomic background. The secondary education final grade determines if the

3Tosimplify the exposition I do not distinguish between higher education and university.

4http://www.oecd.org/pisa/pisaproducts/pisa2009database-downloadabledata.htm

5Judson (1998), Su (2004), and Blankenau (2005) consider the hierarchicalnature of education to study the allocation of

public funds across different levels of education. In this paper expenditures in basic education are taken as given and I

analyze the welfare implications of public expenditure on higher education.

2International Journal of Economic Theory XX (2018) 1–20 © IAET

International Journal of Economic Theory 16 (2020) 196–215 © 2018 IAET 197