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Optimal student loans and graduate tax under moral hazard and adverse selection
Author(s) -
GaryBobo Robert J.,
Trannoy Alain
Publication year - 2015
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12097
Subject(s) - moral hazard , adverse selection , interim , redistribution (election) , incentive , economics , loan , risk aversion (psychology) , income tax , actuarial science , redistribution of income and wealth , ex ante , microeconomics , public economics , finance , expected utility hypothesis , public good , financial economics , macroeconomics , archaeology , politics , political science , law , history
We characterize the set of second‐best “menus” of student‐loan contracts in an economy with risky labor‐market outcomes, adverse selection, moral hazard, and risk aversion. We combine student loans with optimal income taxation. Second‐best optima provide incomplete insurance because of moral hazard. Optimal repayments must be income contingent, or the income tax must comprise a graduate tax. Individuals are ex ante unequal because of differing probabilities of success, and ex post unequal, because taxation trades off incentives and redistribution. In addition, second‐best optima exhibit an interim equalization property: the poststudy but prework expected utilities of newly graduated student types must be equal.