Government Expenditure on the Public Education System

We investigate equilibrium impacts of federal policies such as free-college proposals, taking into account that human capital production is cumulative and that state governments have resource constraints. In the model, a state government cares about household welfare and aggregate educational attainment. Realizing that household choices vary with its decisions, the government chooses income tax rates, per-student expenditure levels on public K-12 and college education, college tuition and the provision of other public goods, subject to its budget constraint. We estimate the model using data from the U.S. Using counterfactual simulations, we find that free-public-college policies, mandatory or subsidized, would decrease state expenditure on and hence the quality of public education. More students would obtain college degrees due to increased enrollment. Over 86% of all households would lose while about 60% of the lowest income quintile would gain from such policies.