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

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  • Tom McKenzie
  • Dirk Sliwka

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.

Suggested Citation

  • Tom McKenzie & Dirk Sliwka, 2011. "Universities as Stakeholders in their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 726-742, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201112)167:4_726:uasits_2.0.tx_2-o
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    1. Graduate taxes, not student loans, for Ireland
      by brianmlucey in Brian M. Lucey on 2016-08-01 10:33:23

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    Cited by:

    1. Wolfram F. Richter & Berthold U. Wigger, 2012. "Besteuerung des Humanvermögens," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 13(1-2), pages 82-102, February.
    2. repec:hal:journl:dumas-00909926 is not listed on IDEAS
    3. Peter Ainsworth & Tom McKenzie & Al Stroyny, 2016. "Incentive Effects in Higher Education: an Improved Funding Model for Universities," Economic Affairs, Wiley Blackwell, vol. 36(3), pages 239-257, October.

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    More about this item

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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