Government Expenditure on the Public Education System

Abstract

We investigate equilibrium impacts of federal policies such as free-college proposals, taking into account that human capital is cumulative and that state governments have resource constraints. In our model, a state government cares about household welfare and aggregate educational attainment. The government chooses income tax rates, per-student expenditures on K-12 and college education, college tuition, and the provision of other public goods. We estimate the model using U.S. data. Our simulations suggest that free-college policies would decrease state expenditure on education. More students would obtain college degrees. Most households would “pay” for the free-college policies through negative welfare effects.