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Title: Human Capital and Optimal Redistribution

Author(s): Winfried Koeniger and Julien Prat

Publication Date: November 2014

Keyword(s): human capital, intergenerational equity and optimal taxation

Programme Area(s): Labour Economics and Public Economics

Abstract: We characterize optimal redistribution in a dynastic economy with observable human capital and hidden ability. The government can use education to improve the insurance-incentive trade-off because there is a wedge between human capital investment in the laissez faire and the social optimum. This wedge differs from the wedge for bequests because: (i) returns to human capital are risky; (ii) human capital may change informational rents. We illustrate numerically that, if ability is i.i.d. across generations, human capital investment declines in parents? income in the social optimum, and show how this optimum can be implemented with student loans or means-tested grants.

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Bibliographic Reference

Koeniger, W and Prat, J. 2014. 'Human Capital and Optimal Redistribution'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10267