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The Effects of Temptation on the Optimal Provision of Education

Jun 2005
Working Paper
05-003
By  Soohyung Lee
This paper provides a framework for analyzing optimal government transfers of education when individuals are tempted to underinvest in education. The government may devise a transfer using a combination of free compulsory education, vouchers and price subsidies. I show that government intervention is needed ifthere is no deadweight loss associated with taxation. If there is a loss from taxation, government intervention is needed only if the level of temptation is sufficiently high. For high levels of temptation, free compulsory education or vouchers are optimal, whereas for intermediate levels of temptation, price subsidies can be optimal.