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Income taxes, subsidies to education, and investments in human capital

Author

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  • C. Mendolicchio
  • D. Paolini
  • T. Pietra
Abstract
We study a two-sector economy with investments in human and physical capital and imperfect labor markets. Human and physical capital are heterogeneous. Workers and firms endogenously select the sector they are active in, and choose the amount of their sector-specific investments in human and physical capital. To enter the high-skill sector, workers must pay a fixed cost that we interpret as direct cost of education. Given the distribution of the agents across sectors, at equilibrium, in each sector there is underinvestment in both human and physical capital, due to non-contractibility of investments. A second source of inefficiency is related to the self-selection of the agents into the two sectors. It typically induces too many workers to invest in education. Under suitable restrictions on the parameters, the joint effect of the two distortions is that equilibria are characterized by too many people investing too little effort in the high skill sector. We also analyze the welfare properties of equilibria and study the effects of several tax-subsidy policies on the total expected surplus.

Suggested Citation

  • C. Mendolicchio & D. Paolini & T. Pietra, 2010. "Income taxes, subsidies to education, and investments in human capital," Working Papers 701, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:701
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    References listed on IDEAS

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    Cited by:

    1. Mendolicchio, Concetta & Pietra, Tito, 2014. "On the efficiency properties of the Roy's model under asymmetric information," IAB-Discussion Paper 201408, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    2. Zabel, Cordula, 2011. "Lone mothers' participation in labor market programs for means-tested benefit recipients in Germany," IAB-Discussion Paper 201114, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    3. Mendolicchio, Concetta & Pietra, Tito, 2024. "On the efficiency properties of the Roy’s model under uncertainty and market incompleteness," MPRA Paper 121150, University Library of Munich, Germany.
    4. Mendolicchio Concetta & Paolini Dimitri & Pietra Tito, 2012. "Asymmetric Information And Overeducation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-29, October.
    5. Drasch, Katrin, 2011. "Do changing institutional settings matter? : educational attainment and family related employment interruptions in Germany," IAB-Discussion Paper 201113, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    6. Engelmann, Sabine, 2011. "Trade liberalisation, technical change and skill-specific unemployment," IAB-Discussion Paper 201119, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].

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    More about this item

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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