A Political Economy Model of Public Budget Allocation Across Education Stages

This paper incorporates two-stage education in a political economy model to study the endogenous determination of public budget allocation across education stages. With hierarchical education, individuals’ benefits from higher education depend on their qualifications, and congestion arises when higher enrollment lowers schooling quality. In less developed economies, the top class has dominant political power to implement its most preferred policy. The budget allocation strongly favors higher education at the cost of basic education, and leads to exclusive participation of the top class in higher education. In developed economies, the budget allocation is more balanced; under certain parameters, it leads to expanded participation of the middle class in higher education. The model offers an explanation to the observed cross-country policy difference, and is broadly consistent with historical evidence. JEL classification: I28; H42; D72