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  4. November 2017
  5. Liquidity Constraints, Fiscal Externalities, and Optimal Tuition Subsidies

Liquidity Constraints, Fiscal Externalities, and Optimal Tuition Subsidies

  • Nicholas Lawson
American Economic Journal: Economic Policy
vol. 9, no. 4, November 2017
(pp. 313-43)
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Abstract

A 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.

Citation

Lawson, Nicholas. 2017. "Liquidity Constraints, Fiscal Externalities, and Optimal Tuition Subsidies." American Economic Journal: Economic Policy, 9 (4): 313-43. DOI: 10.1257/pol.20150079

Additional Materials

JEL Classification

  • H52 National Government Expenditures and Education
  • H75 State and Local Government: Health; Education; Welfare; Public Pensions
  • I22 Educational Finance; Financial Aid
  • I23 Higher Education; Research Institutions
  • I28 Education: Government Policy
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