Tuition Grant and Equity-Efficiency Tradeoff in Stages of Higher Education Development

We study how taxes and alternative higher education financing such as universal, scholarship, and means tested tuition grant schemes affect different groups of individuals, and the implications to equity-efficiency trade off at different phases of higher education development. We based on a simple overlapping generations model where agents are heterogenous in terms of their initial human capital and their ability to learn. Only individuals who afford to pay the minimum tuition fee up front join college while government engages in different types of education subsidy and financing programs. Despite the economy starts from an early stage where only few elites have access to higher education, through a positive externality effects of education that increases individuals. productivity, it ends up to a highly advanced economy where the majority invest in higher education. Among our findings, a scholarship program is the most efficient higher-education-subsidy program at all stages of higher education development due to its highly regressive nature. Wealth distribution under means-tested Lorenz dominates the one in scholarship in all stages. In the early stages, laissez faire is second best followed by universal grant, when it comes to mitigating inequality. In the late stage, universal subsidy Lorenz dominates laissez faire in general and it Lorenz dominates the rest of the schemes for the bottom poor, followed by the laissez fair. However, if the purpose is to narrow the gap between the top earners and the rest of the society, scholarship is the second best. We also find at this stage enrollment rate increases in universal subsidy but decreases in other policies, implying the recent shift away from universal grant scheme in the UK could lead to a decline in enrollment rate.