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

Authors: McKenzie, Tom; Sliwka, Dirk

Source: Journal of Institutional and Theoretical Economics JITE, Volume 167, Number 4, December 2011 , pp. 726-742(17)

Publisher: Mohr Siebeck

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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.

Document Type: Research article

Publication date: 2011-12-01

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Founded as Zeitschrift f�r die gesamte Staatswissenschaft in 1844.

As one of the oldest journals in the field of political economy, the Journal of Institutional and Theoretical Economics (JITE) deals traditionally with the problems of economics, social policy, and their legal framework. JITE is listed in the Journal of Economic Literature, the Social Science Citation Index, the International Bibliography of the Social Sciences, and COREJ.
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