Type: preprint
Abstract: We characterize the set of second-best optimal "menus" of student-loan contracts in a simple economy with risky labour-market outcomes, adverse selection, moral hazard and risk aversion. The model combines student loans with an elementary optimal income-tax problem. The second-best optima provide incomplete insurance because of moral hazard; they typically involve cross-subsidies between students. Generically, optimal loan repayments cannot be decomposed as the sum of an income tax, depending only on earnings, and a loan repayment, depending only on education. Therefore, optimal loan repayments must be income-contingent, or the income tax must comprise a graduate tax. The interaction of adverse selection and moral-hazard, i.e., self-selection constraints and effort incentives, determines an equal treatment property; the expected utilities of different types of students are equalized at the interim stage, conditional on the event of academic success (i.e., graduation). But individuals are ex ante unequal because of differing probabilities of success, and ex post unequal, because the income tax trades off incentives and insurance (redistribution).
Authors: Alain Trannoy, Robert Gary-Bobo
Institutions: Centre National de la Recherche Scientifique, Ifo Institute for Economic Research, Aix-Marseille Université, Aix-Marseille Sciences Economiques, Centre de Recherche en Économie et Statistique, Centre for Economic Policy Research, ENSAE Paris, École des hautes études en sciences sociales
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
Funder: Agence Nationale de la Recherche
OpenAlex ID: W3124026135