Constraints and Policy in Education and Public Budget Limits
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This dissertation investigates the impacts of constraints on optimal government policy. The first two chapters provide a general introduction and review of the literature. Chapters three and four analyze education spending and institutional structure in an economy with informational asymmetries and employment matching frictions. The fifth investigates the impact of politics on government decisions over taxation and spending programs more generally. Chapter three analyzes the situation where governments can target education funds to specific observable groups (referred to as low and high productivity neighbourhoods/regions). The results suggest that it may be optimal to employ educational transfers, rather than cash transfers amongst individuals, to achieve social welfare objectives. This is because the former can reduce distortions created by the tax system. However, the value of educational spending in mitigating these information frictions may not be that large, and may in fact exacerbate such distortions. This suggests that an optimal education policy may be more regressive when there is a distortionary tax system in place. Further, we show that even if ``equalizing opportunities'' is deemed optimal in the static problem, it may not be a reasonable policy goal when we extend the analysis to include dynamics. Chapter four is joint work with Afrasiab Mirza. We analyze an economy where heterogeneous individuals are uncertain about their endowments. The education system trades off the desire to capitalize on talent through specific skills training with the need to provide individuals with opportunities to learn about their career preferences through a broader education. The results consider the implications of various educational institutions for the income distribution and consequently welfare. Chapter five analyzes the dynamics of public spending, taxation and debt in a political agency model. Choices are made by short-lived politicians who can be only partially controlled through the electoral process. The main focus is to consider the impacts of binding limits on the public budget. The value of imposing this additional friction depends both on the extent to which politicians' goals deviate from their constituencies and how effectively the electoral process disciplines them when they misbehave. The results also suggest that the value of such a restriction depends on the fiscal position at the time in which it is imposed.