Income Distribution and the Allocation of Public Education Expenditure

Over the last 30 years, countries with more unequal income distributions tended to spend more on tertiary education and less on secondary education. During the same period of time, countries spending more on tertiary (secondary) education in one decade tended to experience more (less) unequal income distribution in the next decade. Thus, the relationships between the allocation of education spending and income distribution provide a potential explanation for persistent inequality. This paper develops a political economy model capable of accounting for these stylized facts. The allocation of public education expenditure is the outcome of the interaction between an incumbent government and lobbies representing different socio-economic classes. Unlike previous studies of political influences, the formation of lobbies is endogenous in my model, and is determined by the parameters of the economy. The model generates an abundant assortment of lobby formation equilibria and income distribution dynamics. In particular, it shows that in a more unequal economy, the rich tend to capture the political power, which in turn leads to more unequal income distribution for the future generations, and vice versa.