Should Educational Policies be Regressive

In this paper, we study optimal educational policies when the ability to benefit from education is private information. We extend the framework of De Fraja (2002) in two directions. First, we replace his specification of the government’s budget constraint, which prevents the government to use tax revenues from an older generation to subsidize the education of a younger generation, by the usual one. We show that the optimal educational policies achieve the first best, are not regressive, and can be decentralized through Pigouvian taxes and credit provision. Second, we consider utility functions that are not quasi-linear. In this case, we show that the first best can no longer be reached, education may not be monotonic in ability, and progressivities of education are locally welfare-improving.