Government High Education Policy in a Dual Economy: Developing versus Developed Country

Abstract

Abstract By simulating social planner's optimal redistributive policy, this paper analyzes government's high education policy in a dual economy composed by skilled workers that invest in education and unskilled workers that do not. In a developed economy, characterized by an equilibrium with low educational costs, the government subsidizes high education and maximizes output, allowing for substantial tax revenues that are re-distributed through transfers to the unskilled. In contrast, a developing economy is submerged in a bad equilibrium, avoiding subsidizing high education at the expense of increasing output; by acting this way, the government succeeds on performing substantial re-distribution, obtaining higher social utility that is inclusive of unskilled workers. When the developing economy is trapped in a bad equilibrium, I show that its situation can be improved by receiving a designated high-education subsidy from an international institution. JEL Classifications: H21