Insuring Educational Risk: "It is the Quality of Education"

We develop a model of education where individuals face educational risk. Successfully entering the skilled labor sector depends on individual effort in education and public resources, but educational risk still causes (income) inequality. We show that in a Second-best setting improving quality of education, i.e., the probability of success, by public funding of the educational sector matters more than granting direct income transfers from skilled workers to unskilled ones. Thus, ex ante insurance is more important than ex post income redistribution. These results are even strengthened, in case (distortionary) skill-specific taxes are available. JEL Klassifikation : H21, I2, J2 Schlüsselwörter : human capital investment, endogenous risk, learning effort, optimal taxation, public education Download/Reference : http://www.wiwi.uni-konstanz.de/forschergruppewiwi/ Benjamin Weigert Justus-Liebig-Universität Gießen Licher Straße 66 35394 Giessen Germany mail: [email protected] phone: +49-621-1235-283 fax: +49-621-1235-225 Dirk Schindler University of Konstanz Faculty of Economics Fach 133 78457 Konstanz Germany mail: [email protected] phone: +49-7531-883691 fax: +49-7531-884101 Insuring Educational Risk: “It Is the Quality of Education”∗ Dirk Schindler† Universität Konstanz and CESifo Benjamin Weigert Justus-Liebig-Universität Gießen