COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1887 Education Policy and Intergenerational Transfers in Equilibrium Brant Abbott, Giovanni Gallipoli, Costas Meghir and Giovanni L. Violante February 2013 This paper compares partial and general equilibrium effects of
alternative financial aid policies intended to promote college participation. We build an
overlapping generations life-cycle, heterogeneous-agent, incomplete-markets model with
education, labor supply, and consumption/saving decisions. Altruistic parents make inter
vivos transfers to their children. Labor supply during college, government grants and
loans, as well as private loans, complement parental transfers as sources of funding for
college education. We find that the current financial aid system in the U.S. improves
welfare, and removing it would reduce GDP by two percentage points in the long-run. Any
further relaxation of government-sponsored loan limits would have no salient effects. The
short-run partial equilibrium effects of expanding tuition grants (especially their
need-based component) are sizeable. However, long-run general equilibrium effects are 3-4
times smaller. Every additional dollar of government grants crowds out 20-30 cents of
parental transfers. |
