The primary objective of this paper is to develop a political economy of public funding of education that accounts for the large disparities observed across countries in the share of GNP allocated to public education. In a general equilibrium overlapping generations model in which parents care about their childrens lifetime utility the rational and forward looking agents vote for a level of public funding of education. The model mirrors the observed cross-country disparities in the share of GNP allocated to public funding of education. This share increases with per capita income levels as well as with the fertility rate and it decreases with the degree of inequality in the economy. For higher levels of inequality the model can generate a politico-economic equilibrium where private and public investment on education coexist. In contrast to existing theories the paper does not assume that the factor prices are invariant and I study the importance of the effects of an education policy on the factor prices in the determination of the equilibrium level of this policy.
Author(s): Jorge Soares (Washington University)