Working Paper: CEPR ID: DP10267
Authors: Winfried Koeniger; Julien Prat
Abstract: We characterize optimal redistribution in a dynastic economy with observable human capital and hidden ability. The government can use education to improve the insurance-incentive trade-off because there is a wedge between human capital investment in the laissez faire and the social optimum. This wedge differs from the wedge for bequests because: (i) returns to human capital are risky; (ii) human capital may change informational rents. We illustrate numerically that, if ability is i.i.d. across generations, human capital investment declines in parents? income in the social optimum, and show how this optimum can be implemented with student loans or means-tested grants.
Keywords: human capital; intergenerational equity; optimal taxation
JEL Codes: E24; H21; I22; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Parental Income (D31) | Children's Human Capital Investment (J24) |
| Human Capital Investment (J24) | Optimal Redistribution (H21) |
| Bequests (D64) | Labor Supply (J20) |
| Optimal Strategy (L21) | Discourage Human Capital Investment for High-Income Families (H31) |