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- Publisher
- Wiley
- Copyright
- © 2015 The RAND Corporation
- ISSN
- 0741-6261
- eISSN
- 1756-2171
- DOI
- 10.1111/1756-2171.12097
- Publisher site
- See Article on Publisher Site
Abstract
We characterize the set of second‐best “menus” of student‐loan contracts in an economy with risky labor‐market outcomes, adverse selection, moral hazard, and risk aversion. We combine student loans with optimal income taxation. Second‐best optima provide incomplete insurance because of moral hazard. Optimal repayments must be income contingent, or the income tax must comprise a graduate tax. Individuals are ex ante unequal because of differing probabilities of success, and ex post unequal, because taxation trades off incentives and redistribution. In addition, second‐best optima exhibit an interim equalization property: the poststudy but prework expected utilities of newly graduated student types must be equal.
Journal
The Rand Journal of Economics – Wiley
Published: Sep 1, 2015