Education Policy and Intergenerational Transfers in Equilibrium

Abstract

This paper examines the equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Driven by both altruism and paternalism, parents make inter vivos transfers to their children. Both cognitive and non-cognitive skills determine the non-pecuniary cost of schooling. Labor supply during college, government grants and loans, as well as private loans, complement parental resources as means of funding college education. We find that the current financial aid system in the U.S. improves welfare, and removing it would reduce GDP by 4-5 percentage points in the long-run. Further expansions of government-sponsored loan limits or grants would have no salient aggregate effects because of substantial crowding-out: every additional dollar of government grants crowds out 30 cents of parental transfers plus an equivalent amount through a reduction in student's labor supply. However, a small group of high-ability children from poor families, especially girls, would greatly benefit from more generous federal aid.

College Tuition and Income Inequality

“…Under this college-as-investment interpretation, the relative roles of student ability versus parental income as drivers of college quality choices will depend on students' ability to borrow to pay for college. Embedding our model of the college market into a life-cycle framework with a quantitative model of the student loan market is one possible avenue for future research in this area (see, for example, Abbott et al 2016).…”

The Use of Structural Models in Econometrics

“…At the same time, this provides an excellent example of how studies focus on some key features of equilibrium but not on others; this is both because of the need for focus on a particular question and for keeping modeling and computational complexity in check. Heckman, Lochner, and Taber (1998) and Lee and Wolpin (2008) focus on changes in equilibrium in the labor market; Abbott, Gallipoli, Meghir, and Violante (2013) also focus on the labor market equilibrium but in addition endogenize intergenerational links. Chiappori, Costa Dias, and Meghir (forthcoming), on the other hand, focus on equilibrium in the marriage market and on intrahousehold allocations, but do not consider changes in the labor market equilibrium, keeping wages constant.…”

“…The greatest "entry cost" for a researcher wishing to estimate dynamic structural models is learning to solve such models accurately and efficiently. For a broader textbook discussion of these methods, useful starting points include Adda and Cooper (2003) and Miranda and Fackler (2002). Some more recent, faster methods are due to Carroll (2006), Fella (2014, and Barillas and Fernández-Villaverde (2007).…”

Correlation, Consumption, Confusion, or Constraints: Why Do Poor Children Perform so Poorly?

“…Lazear (1977) provides an early analysis of education as a joint producer of human capital/earnings and utility. Keane and Wolpin (2001), Cunha et al (2005), and Carneiro et al (2011) emphasize and estimate the role of heterogeneity in the "consumption" value of schooling in explaining differences in schooling behavior, while Abbott et al (2013) explicitly consider differences in tastes for schooling by parental wealth. To study the implications of this mechanism for investments in young children, we incorporate tastes for schooling ν = 0 as in equation (4), while continuing to assume perfect information, no credit constraints with V (a 3 , h 3 ) = u(Ra 3 + h 3 ), and z = 1.…”

“…If investments provide a direct benefit to parents above and beyond the future labor market returns to children, then parents will choose to invest more as their income rises, in a similar way as they would purchase more of any other normal good (Lazear, 1977). It is also possible that low-and high-income families place different intrinsic value on investments or human capital more generally (Abbott et al, 2013). 3.…”