International Tax and Public Finance

, Volume 7, Issue 4, pp 547-562

First online:

Why Invest in Your Neighbor? Social Contract on Educational Investment

  • Panu Poutvaara
  • , Vesa Kanniainen

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It may be in the interestof low-ability individuals to subsidize the education of high-abilityindividuals. The sufficient conditions are surprisingly mild:positive externalities in education and complementarity in productionbetween human capital and labor supplied by the low-ability individuals.However, tax competition and the free mobility of the educatedgive rise to time-inconsistency and free-riding problems whichrender such a social contract infeasible and result in a suboptimallylow investment in education.

externalities in education complementarity social contract tax competition