The graduate tax when education is a signal

Russayani Ismail and Gareth Myles ()

Research in Economics, 2016, vol. 70, issue 1, 24-37

Abstract: This paper investigates the effects of a graduate tax when the return to education is uncertain and wages are determined through equilibrium in a labor market with signalling. The consequence of uncertainty is that both ability and initial wealth matter for educational choice. Compared to a constrained first-best the market outcome with uncertainty and signalling results in an inefficiently high number of people entering higher education. Due to the positive wealth effect over-entry is proportionately greater for high-wealth individuals. The graduate tax reduces entry into education so enhances efficiency. However, it has undesirable distributional consequences: low-wealth individuals are deterred from entering education but high-wealth are encouraged. In this respect, the graduate tax has clear failings as a method of financing higher education.

Keywords: Higher education; Uncertainty; Signalling; Graduate tax (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:70:y:2016:i:1:p:24-37

DOI: 10.1016/j.rie.2015.07.008

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