Education Subsidies, Income Inequality and Intergenerational Mobility

This paper analyzes the role of endogenous education subsidies in the process of development. This process stems from an increase in human capital due to in-tergenerational mobility of individuals born of uneducated parents who invest in education. We find that in the absence of capital markets to finance investments in human capital, education subsidies play a key role in intergenerational mobility. We also investigate the determinants of the political support of this education pol-icy. This support depends positively on the level of development of the economy, measured by the proportion of educated individuals. Interestingly, the impact of income inequality on the size of the subsidy is not monotone. We obtain that the magnitude of the subsidy is higher at intermediate levels of inequality