Choosing the type of income-contingent loan: risk-sharing versus risk-pooling

Elena Del Rey and Maria Racionero

No 2014/7, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: This paper analyses the choice between risk-sharing and risk-pooling income-contingent loans for higher education of risk-averse individuals who differ in their ability to benefit from education and inherited wealth. The paper identifies the possible outcomes of a majority vote between the two income-contingent schemes and provides several examples where the risk-pooling income-contingent loan is preferred. The paper then discusses the implications on participation and voting outcomes if successful graduates are mobile and provides examples where the riskpooling income-contingent loan remains being preferred. Risk-pooling schemes can however be prone to adverse selection problems, particularly if students are mobile. The paper explores the implications of allowing students to opt out of the riskpooling income-contingent loan for a pure loan. It shows that risk-pooling income-contingent loans can be sustained even when some students opt out.

Keywords: Voting; higher education; income-contingent loans; risk; mobility (search for similar items in EconPapers)
JEL-codes: D72 H52 I22 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Choosing the type of income-contingent loan: risk-sharing versus risk-pooling (2012)
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