Human capital and optimal redistribution

Abstract

We characterize optimal redistribution in a dynastic family model with human capital. We show how a government can improve the trade-o¤ between equality and incentives by changing the amount of observable human capital. We provide an intuitive decomposition for the wedge between human-capital investment in the laissez faire and the social optimum. This wedge di¤ers from the wedge for bequests because human capital carries risk: its returns depend on the non-diversi…able risk of children's ability. Thus, human capital investment is encouraged more than bequests in the social optimum if human capital is a bad hedge for consumption risk.

Optimal Need-Based Financial Aid

“…In Findeisen and Sachs (2016), we focus on history-dependent policies and show how history-dependent labor wedges can be implemented with an income-contingent college loan system. Koeniger and Prat (2017) study optimal history-dependent human capital policies in a dynastic economy where education policies also depend on parental background. Stantcheva (2015) derives education and tax policies in a dynastic model with multidimensional heterogeneity, characterizing the relationship between education and bequest policies.…”

Dynamic Taxation

“…Stantcheva (2015b) considers an intergenerational setting in which parents invest in children's human capital and can choose to transfer resources in the form of bequests and human capital. Koeniger & Prat (2018) study a very similar setting and provide quantitative results. Makris & Pavan (2019) consider income taxation when there is learning-by-doing, i.e., human capital acquisition happens as a by-product of working.…”

Shaping Inequality and Intergenerational Persistence of Poverty: Free College or Better Schools

“…Recent papers in this genre focusing on education (financing) reform include Abbott et al (2019), , Stantcheva (2017), Capelle (2020), Fu et al (2023) and also Athreya et al (2019), Fogli et al (2023 as well as our own work, Krueger and Ludwig (2016). An important part of this literature studies the impact of tax-and education policy on intergenerational mobility, 6 see, e.g., Restuccia and Urrutia (2004), Holter (2015), Lee and Seshadri (2019), Koeniger and Prat (2018) and Koeniger and Zanella (2022), and a complementary and equally relevant literature studies (optimal) tax-transfer and poverty alleviation policy (transitions), see, e.g., Boar and Midrigan (2022), Dyrda and Pedroni (2023), Daruich and Fernández (2024), Floden (2001), Ortigueira and Siassi (2023), Guner et al (2020) and Guner et al (2021). 7 In contrast to most of this existing literature, this project takes as central tenet that the heterogeneity in initial conditions at labor market entry with respect to human capital and wealth is an endogenous object that can be affected by education and fiscal policies.…”