EconPapers    
Economics at your fingertips  
 

Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection

Robert Gary-Bobo () and Alain Trannoy ()

No 9505, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We completely characterize the set of second-best optimal "menus" of student-loan contracts in a simple economy with risky labour-market outcomes, adverse selection, moral hazard and risk aversion. The model combines structured student loans and an elementary optimal income-tax problem à la Mirrlees. This combination can be called a graduate tax. There are two categories of second-best optima: the equal treatment and the separating allocations. The equal treatment case is obtained when the social weights of student types are close to their population frequencies; the expected utilities of different types are then equalized, conditional on the event of success on the labor market. But individuals are ex ante unequal because of differing probabilities of success, and ex post unequal, because the income tax trades off incentives and insurance (redistribution). In separating optima, the talented types bear more risk than the less-talented ones; they arise only if the social weight of the talented types is sufficiently high. The second-best optimal graduate tax provides incomplete insurance because of moral hazard; it typically involves cross-subsidies; generically, it cannot be decomposed as the sum of an optimal income tax depending only on earnings, and a loan repayment, depending only on education. Therefore, optimal loan repayments must be income-contingent.

Keywords: asymmetric information; higher education; mechanism design; optimal taxation; student loans (search for similar items in EconPapers)
JEL-codes: D82 H21 I22 I24 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9505 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Optimal student loans and graduate tax under moral hazard and adverse selection (2015) Downloads
Working Paper: Optimal student loans and graduate tax under moral hazard and adverse selection (2015)
Working Paper: Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection (2014) Downloads
Working Paper: Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection (2014) Downloads
Working Paper: Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection (2013) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:9505

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=9505

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2020-04-03
Handle: RePEc:cpr:ceprdp:9505