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Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection

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  • Robert J. Gary‐bobo

    (UP1 UFR02 - Université Paris 1 Panthéon-Sorbonne - École d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne, ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique)

  • Alain Trannoy
Abstract
We completely characterize the set of second-best optimal "menus" of student-loan contracts in a simple economy with risky labour-market outcomes, adverse selection, moral hazard and risk aversion. The model combines structured student loans and an elementary optimal income-tax problem à la Mirrlees. This combination can be called a graduate tax. There are two categories of second-best optima: the equal treatment and the separating allocations. The equal treatment case is obtained when the social weights of student types are close to their population frequencies; the expected utilities of different types are then equalized, conditional on the event of success on the labor market. But individuals are ex ante unequal because of differing probabilities of success, and ex post unequal, because the income tax trades off incentives and insurance (redistribution). In separating optima, the talented types bear more risk than the less-talented ones; they arise only if the social weight of the talented types is sufficiently high. The second-best optimal graduate tax provides incomplete insurance because of moral hazard; it typically involves cross-subsidies; generically, it cannot be decomposed as the sum of an optimal income tax depending only on earnings, and a loan repayment, depending only on education. Therefore, optimal loan repayments must be income-contingent.
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  • Robert J. Gary‐bobo & Alain Trannoy, 2015. "Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection," Post-Print hal-03572114, HAL.
    • Handle: RePEc:hal:journl:hal-03572114
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    Cited by:

    1. Lance Lochner & Todd Stinebrickner & Utku Suleymanoglu, 2021. "Parental Support, Savings, and Student Loan Repayment," American Economic Journal: Economic Policy, American Economic Association, vol. 13(1), pages 329-371, February.
    2. Lance Lochner & Alexander Monge-Naranjo, 2014. "Student Loans and Repayment: Theory, Evidence and Policy," Working Papers 2014-40, Federal Reserve Bank of St. Louis.
    3. Long, Ngo Van, 2019. "Financing higher education in an imperfect world," Economics of Education Review, Elsevier, vol. 71(C), pages 23-31.
    4. Winfried Koeniger & Julien Prat, 2018. "Human Capital and Optimal Redistribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 1-26, January.
    5. Youngmin Park, 2018. "Inequality in Parental Transfers, Borrowing Constraints, and Optimal Higher Education Subsidies," 2018 Meeting Papers 623, Society for Economic Dynamics.
    6. Guy Meunier & Jean-Pierre Ponssard, 2021. "Designing Conditional Schemes for Green Industrial Policy under Different Information Structures," CESifo Working Paper Series 8881, CESifo.
    7. Matsuda, Kazushige & Mazur, Karol, 2022. "College education and income contingent loans in equilibrium," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 100-117.
    8. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, vol. 138(C), pages 1-21.
    9. Ryota Nakano, 2024. "Intergenerational Mobility and Student Loans," ISER Discussion Paper 1248, Institute of Social and Economic Research, Osaka University.
    10. Radoslaw Paluszynski & Pei Cheng Yu, "undated". "Optimal Taxation with Risky Human Capital and Retirement Savings," Discussion Papers 2019-05, School of Economics, The University of New South Wales.
    11. Yoseph Getachew, 2018. "Tuition Grant and Equity-Efficiency Tradeoff in Stages of Higher Education Development," Working Papers 201882, University of Pretoria, Department of Economics.
    12. Christian Belzil & Julie Pernaudet, 2023. "Les effets à court et moyen terme du soutien financier aux étudiants au Québec et dans le reste du Canada," CIRANO Project Reports 2023rp-15, CIRANO.
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    14. Nadia Karamcheva & Jeffrey Perry & Constantine Yannelis, 2020. "Income-Driven Repayment Plans for Student Loans: Working Paper 2020-02," Working Papers 56337, Congressional Budget Office.
    15. Sylwia Radomska, 2019. "Optimal Policy for Investment in Human Capital in the Light of Optimal Tax Theory (Inwestycje w kapital ludzki w swietle optymalnej teorii podatkowej)," Research Reports, University of Warsaw, Faculty of Management, vol. 1(30), pages 34-42.
    16. Cox, James C. & Kreisman, Daniel & Dynarski, Susan, 2020. "Designed to fail: Effects of the default option and information complexity on student loan repayment," Journal of Public Economics, Elsevier, vol. 192(C).
    17. Gustavo Pereira Serra, 2023. "Household debt, student loan forgiveness, and human capital investment: a neo-Kaleckian approach," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 46(1), pages 173-206, January.
    18. Getachew, Yoseph, 2024. "Effects of higher education subsidies on equity and efficiency across developmental stages," Economic Modelling, Elsevier, vol. 136(C).
    19. Higgins, Tim & Sinning, Mathias, 2013. "Modeling income dynamics for public policy design: An application to income contingent student loans," Economics of Education Review, Elsevier, vol. 37(C), pages 273-285.
    20. Michael Boutros & Nuno Clara & Francisco Gomes, 2023. "Borrow Now, Pay Even Later: A Quantitative Analysis of Student Debt Payment Plans," Staff Working Papers 23-54, Bank of Canada.
    21. Tomás Monarrez & Lesley J. Turner, 2024. "The Effect of Student Loan Payment Burdens on Borrower Outcomes," Working Papers 24-08, Federal Reserve Bank of Philadelphia.
    22. Meunier Guy & Ponssard Jean-Pierre, 2017. "Financing innovative green projects with asymmetric information and costly public funds," Working Papers 2017-55, Center for Research in Economics and Statistics.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality

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