Public-Private Input Substitution and Growth in a Two-Stage Education System

The paper studies the interaction between public and private inputs in a two-stage education framework (K-12 and tertiary education). We …nd that an increase in the overall educational public spending crowds out the total level of private contributions and increases the share of total private resources that households devote to K-12 education. Given a …xed level of public funding, a higher share of K-12 public funding prompts households to spend more on education overall and in the same time, to allocate a higher share of their investments towards higher education. In terms of optimal policies, our results suggest that the share of public spending devoted to K-12 should be high irrespective of the size of the public budget. We also …nd that higher income taxes produce a reallocation of private resources towards the …rst educational stage. Consequently, the optimal fraction of public budget allocated to higher education is higher in economies with higher taxes. JEL classi…cation: H23, H4, H52, I2