Education policy and intergenerational transfers in equilibrium

Brant Abbott, Giovanni Gallipoli (), Costas Meghir and Gianluca Violante ()
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Gianluca Violante: Institute for Fiscal Studies and Princeton University

No W16/04, IFS Working Papers from Institute for Fiscal Studies

Abstract: This paper examines the equilibrium effects of alternative financial aid policies intended to promote college participation. We build an overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Driven by both altruism and paternalism, parents make inter vivos transfers to their children. Both cognitive and non-cognitive skills determine the non-pecuniary cost of schooling. Labor supply during college, government grants and loans, as well as private loans, complement parental resources as means of funding college education. We find that the current financial aid system in the U.S. improves welfare, and removing it would reduce GDP by 4-5 percentage points in the long-run. Further expansions of government-sponsored loan limits or grants would have no salient aggregate effects because of substantial crowding-out: every additional dollar of government grants crowds out 30 cents of parental transfers plus an equivalent amount through a reduction in student’s labor supply. However, a small group of high-ability children from poor families, especially girls, would greatly benefit from more generous federal aid. A newer version of this working paper is available here.

Keywords: Education; Financial Aid; Intergenerational Transfers; Altruism; Paternalism; Credit Constraints; Equilibrium. (search for similar items in EconPapers)
JEL-codes: E24 I22 J23 J24 (search for similar items in EconPapers)
Date: 2016-03-21
New Economics Papers: this item is included in nep-dge, nep-edu, nep-lma, nep-ltv and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Journal Article: Education Policy and Intergenerational Transfers in Equilibrium (2019)
Working Paper: Education policy and intergenerational transfers in equilibrium (2018)
Working Paper: Education Policy and Intergenerational Transfers in Equilibrium (2013)
Working Paper: Education policy and intergenerational transfers in equilibrium (2013)
Working Paper: Education Policy and Intergenerational Transfers in Equilibrium (2013)
Working Paper: Education Policy and Intergenerational Transfers in Equilibrium (2013)
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