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Efficient Funding of Higher Education

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  • Hatsor, Limor
Abstract
I implement a basic tool of financial markets—namely, a portfolio—into student loans. In higher education funding, credit market loans (CMLs) lead to underinvestment, while income-contingent loans (ICLs) produce over-investment. This research introduces a ‘portfolio regime’ (PR), which allows students to combine CMLs and ICLs. The model assumes that agents privately invest in higher education after receiving a noisy signal about their future incomes. The article compares a PR with a ‘competition regime’ (CR), which allows students to choose one type of loan but prohibits a portfolio. The key insight is that implementation of a PR may improve the efficiency of investment in higher education and social welfare. Nevertheless, the PR does not maximize social welfare because of adverse selection into ICL programs.

Suggested Citation

  • Hatsor, Limor, 2014. "Efficient Funding of Higher Education," Foerder Institute for Economic Research Working Papers 275827, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275827
    DOI: 10.22004/ag.econ.275827
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    References listed on IDEAS

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    1. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522543, April.
    2. Erik Hanushek & F. Welch (ed.), 2006. "Handbook of the Economics of Education," Handbook of the Economics of Education, Elsevier, edition 1, volume 1, number 1, June.
    3. Checchi,Daniele, 2008. "The Economics of Education," Cambridge Books, Cambridge University Press, number 9780521066464, October.
    4. Erik Hanushek & F. Welch (ed.), 2006. "Handbook of the Economics of Education," Handbook of the Economics of Education, Elsevier, edition 1, volume 2, number 2, June.
    5. Nicholas Barr & Iain Crawford, 1998. "Funding Higher Education in an Age of Expansion," Education Economics, Taylor & Francis Journals, vol. 6(1), pages 45-70.
    6. Chapman, Bruce, 2006. "Income Contingent Loans for Higher Education: International Reforms," Handbook of the Economics of Education, in: Erik Hanushek & F. Welch (ed.), Handbook of the Economics of Education, edition 1, volume 2, chapter 25, pages 1435-1503, Elsevier.
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    Cited by:

    1. Hatsor, Limor, 2015. "Higher education funding: The value of information," Economics Letters, Elsevier, vol. 137(C), pages 230-233.

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