Universities as stakeholders in their students' careers: On the benefits of graduate taxes to finance higher education

Tom McKenzie, Dirk Sliwka

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    2 Citations (Scopus)


    We compare up-front tuition fees with graduate taxes for funding higher education. Graduate taxes transfer the volatility in future income from risk-averse students to the risk-neutral state. However, a double moral-hazard problem arises when graduates' work effort and universities' teaching quality are endogenized. Graduate taxes reduce work incentives, but induce universities to improve teaching quality. Yet if revenues are distributed evenly among universities, there is free riding. This is solved by allocating each university the tax revenue from its own alumni.We also demonstrate how a budget-balancing graduate tax would encourage higher university participation than the equivalent tuition fee.
    Original languageEnglish
    Pages (from-to)726-742
    Number of pages17
    JournalJournal of Institutional and Theoretical Economics
    Issue number4
    Publication statusPublished - Dec 2011


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