Demographic Structure and the Political Economy of Education Subsidies

This paper investigates the politico-economic impact of a society's age structure on the extent of public funding of education. Education subsidies serve to internalize positive spillovers of human capital investment, but redistribute resources from the working old to the non-working young, thus creating a conflict of interest between the two generations. The political process is characterized by a representative democracy. In the steady state, high rates of population growth lead to oversubsidization, while low rates lead to undersubsidization, relative to a lifetime income maximizing situation. Population aging leads to higher educational subsidies in the politico-economic equilibrium. Starting from a situation of undersubsidization, this raises lifetime incomes.