Public overspending in higher education

Abstract We study the trade‐off between governmental investments in pretertiary and tertiary education from an efficiency point of view. develop a model comprising agents with different incomes abilities, public private schools, universities that select applicants based on admission exam. Reallocating resources to may positively affect aggregate production human capital if some conditions are satisfied. For instance, economy high proportion credit‐constrained students, reallocation expenditure toward schools benefits many compensating for negative effect decrease university investments. also quantitatively investigate optimal allocation investment education, we find 10% increase productivity could GDP 2.1% 3%.