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Risky higher education and subsidies
Tertiary education in the U.S. requires large investments that are risky, lumpy, and well-timed. Tertiary education is also heavily subsidized. By making the risk of human capital investment more acceptable, especially to low wealth households, subsidies may increase investment in human capital, lower long-run inequality, and reduce aggregate precautionary savings. However, subsidies also encourage more poorly prepared students to attend and are usually financed via distortionary taxes. In this paper, we find that observed collegiate subsidies improve welfare substantially relative to the fully decentralized (zero subsidy) outcome. We show that subsidies help smooth consumption, lower skill premia, increase interest rates as precautionary savings fall, lower the inequality of both consumption and wealth, increase intergenerational income mobility and raise welfare, even when financed by distortionary taxes.
AUTHORS: Akyol, Ahmet; Athreya, Kartik B.
Credit and self-employment
Limited personal liability for debts has long been justified as a tool to promote entrepreneurial risk taking by providing insurance to the borrower in the event of low returns. Nonetheless, such limits erode repayment incentives, and so may increase unsecured borrowing costs. Our paper is the first to evaluate the tradeoff between credit costs and insurance against failure. We build a life-cycle model with risky, and repeated, occupational choice in the presence of defaultable debt contracts. We find that limits to liability can encourage self-employment, and alter the timing, size, and financing of self-employment projects. We also find that the positive relationship between wealth and self-employment rates may not be evidence for credit constraints: We show that such a relationship is present even when limited liability is eliminated.
AUTHORS: Athreya, Kartik B.; Akyol, Ahmet