The Political Economy of Post-Compulsory Education Policy with Endogenous Credit Constraints

Altruistic parents, who differ in income, make financial transfers to their children, who differ in ability. The children invest in post-compulsory education, subject to an endogenous credit constraint, and taking policy as given. There are two policy tools: a subsidy to those who participate in education and a proportional income tax. Not all children participate; a larger subsidy encourages participation, and a larger income tax discourages it. The parents, prior to making transfers, vote on policy. A voting equilibrium, if it exists, is such that voters in the two tails of the income distribution support a reduction, while the “middle-class” supports an expansion, of the education subsidy. Public support of education is a policy with regressive elements as it entails, among other things, a redistribution from the poor to the middle-earners. We characterise a local equilibrium analytically, verify its existence numerically, and finally perform a number of comparative statics exercises.