Working Paper: CEPR ID: DP13196
Authors: Dominik Sachs; Sebastian Findeisen; Mark Colas
Abstract: We study the optimal design of student financial aid as a function of parental income. We derive optimal financial aid formulas in a general model. For a simple model version, we derive mild conditions on primitives under which poorer students receive more aid even without distributional concerns. We quantitatively extend this result to an empirical model of selection into college for the United States that comprises multidimensional heterogeneity, endogenous parental transfers, dropout, labor supply in college, and uncertain returns. Optimal financial aid is strongly declining in parental income even without distributional concerns. Equity and efficiency go hand in hand.
Keywords: financial aid; college subsidies; optimal taxation; inequality
JEL Codes: H21; H23; I22; I24; I28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Targeted increases in financial aid for students below the 45th percentile of parental income distribution (I24) | Increased future tax revenue (H29) |
| Parental income (D31) | Optimal financial aid (I22) |
| Share of inframarginal students (D29) | Optimal financial aid (I22) |
| Share of marginal students (D29) | Optimal financial aid (I22) |
| Parental income (D31) | Optimal financial aid policies (I22) |