Unit 7: (Epple and Romano model, 1996)

Question 1

3 key points behind Epple and Romano set up?

Answer 1

• Assumes income level characterises the individual, and the government have the option to introduce progressive taxation
• Households maximise utility based on consumption of a generic good and education
• Households can choose whether education is publicly or privately financed

Question 2

What are the results of the E+R (1996) model? (R,P and M, and eq.)

Answer 2

Rich: vote low tax as decide on private education
Poor: vote low tax as at their income level (ie. MU(edu.)

Question 3

Does the E+R model necessarily lead to MV choice?

Answer 3

NO!

Question 4

Note:

Answer 4

E+R and F+R models only account for possible differences in INCOME of households

Question 5

(based on) De Fraja (2002): explain the model set up?

Answer 5

Mothers and daughters: 2 period model
Mother receives income (public info.) and knows her daughter’s ability (private info.)
She then chooses how much to spend on her daughter’s education

Question 6

DF (2002): What does the daughter’s income in P2 depend on?

Answer 6

Ability and education level (imperfect credit markets)

Question 7

DF (2002): What do mothers maximise? What other option do they have? What are their risk preferences?

Answer 7

Maximise current utility and daughter’s future income
Can offer a transfer, t, to daughter
Risk-neutral

Question 8

DF (2002): Explain stage 1 of the model?

Answer 8

Individual is born with ability θ(m), receives education e(m) and possibly a transfer from mother of t(m)

It is at this stage the mother solves the utility maximising problem by choosing work effort provided in her job

Question 9

DF (2002): Explain stage 2 of the model?

Answer 9

This individual decides work effort w(m) and receives income Y(m), the education spending for her daughter ke, consumption level c and a possible transfer to her daughter for the future, t. She also knows her daughters ability, theta. She now solves her HH maximisation problem, choosing ke and t (see notes for rest)

Question 10

DF (2002): 3 potential policies for funding education?

Answer 10

Tax (conditional on income)

Student loan: upfront fee or deferred fee (both conditional on ability) (see and learn slide 50 diagram)

Question 11

2 main conclusions from DF (2002) model?

Answer 11

They conclude that an optimal education system will allow most able students to receive higher education regardless of their ability - however for less able students it will likely depend on family income!

Model also provides an explanation to counter-intuitive regressive redistribution education policy

Question 12

2 important mechanisms determined by the DF (2002) model?

Answer 12

1) Education policy has to be able to motivate the most able to obtain highest education level!
2) Taxation is limited in its ability to pay for education; if too high there is not enough incentive to work! (read paper maybe?)

Question 13

How do and E+R solve their model?

Answer 13

Households maximise utility, HHs choosing private education solve one utility function, while those choosing public solve another

Question 14

Explain why the E+R model predicts low taxes, low public financing of education and lower quality education than the middle income would prefer?

Answer 14

see notes