A large literature focuses on two important rationales for government subsidies to college students: positive fiscal externalities from a larger tax base, and liquidity constraints. This paper provides a first attempt to gauge the relative importance of these mechanisms. I use US data in combination with two modeling approaches: calibration of a simple structural model of human capital accumulation, and a "sufficient statistics" approach. The resulting optimal subsidies are larger than median public tuition by about $3,000 per year. This finding is driven by fiscal externalities; optimal tuition subsidy policy is not sensitive to the extent of liquidity constraints.
"Liquidity Constraints, Fiscal Externalities, and Optimal Tuition Subsidies."
American Economic Journal: Economic Policy,
National Government Expenditures and Education
State and Local Government: Health; Education; Welfare; Public Pensions
Educational Finance; Financial Aid
Higher Education; Research Institutions
Education: Government Policy