Universities as Stakeholders in their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education

Tom McKenzie and Dirk Sliwka

Journal of Institutional and Theoretical Economics (JITE), 2011, vol. 167, issue 4, 726-742

Abstract: We compare up-front tuition fees with graduate taxes for funding higher education. Graduate taxes transfer the volatility in future income from risk-averse students to the risk-neutral state. However, a double moral-hazard problem arises when graduates' work effort and universities' teaching quality are endogenized. Graduate taxes reduce work incentives, but induce universities to improve teaching quality. Yet if revenues are distributed evenly among universities, there is free riding. This is solved by allocating each university the tax revenue from its own alumni. We also demonstrate how a budget-balancing graduate tax would encourage higher university participation than the equivalent tuition fee.

JEL-codes: H42 H52 I22 M52 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Working Paper: Universities as Stakeholders in their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education (2010)
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