Public and household financing of education in India: are they substitutes or complements?

Abstract

The present study investigates the relationship between public and household education expenditures in India from 1987 to 2018, using data from the National Sample Survey. Unlike previous studies that often considered education financing in isolation, this study employs an Intertemporal Utility Maximization framework to estimate the substitutability or complementarity between these expenditures. The analysis is based on the Auspitz-Lieben-Edgeworth-Pareto (ALEP) approach, diverging from the traditional Hicks-Allen method. By doing so, it extends the theoretical literature on the substitutability and complementarity of these expenditures under the ALEP framework. Empirical findings, derived from the Generalised Method of Moments in dynamic panel data analysis, indicate that public and household education expenditures in India are complementary. Specifically, increased public spending on education enhances the marginal utility of household education expenditure. These results are consistent under both linear and non-linear utility function specifications. The study concludes by emphasizing the importance of increasing public spending to provide essential amenities, thereby encouraging Indian households to invest more in their children’s education.