Tertiary Educational Choices : the United States versus Europe

We study whether differences in productivity in the tertiary education sector and differences in educational and tax policies can explain differences in educational outcomes in the United States and Europe, especially lower European tertiary attainment and lower tertiary earnings premium. We calibrate a general equilibrium model with heterogeneous agents and dynasties which allows for schooling choice at the tertiary level. We find that high European schooling subsidies combined with significantly lower productivity of the tertiary sector can account for the observed differences. Tertiary sector productivity is quantitatively more important than educational subsidies, which can explain only 14-20 percent of differences in tertiary attainment. On the other hand, higher educational subsidies relax credit constraints and lead to a more efficient allocation of skills at the tertiary level. The allocation of skills is, however, quite close to the first-best allocation of skills in both United States and Europe. We are grateful to Hugo Rodriguez-Mendizabal, Juan Carlos Conesa, Tim Kehoe, Chris Telmer, Nezih Guner, and the participants at seminars at CSIC, Universitat Autonoma in Barcelona, Bilbao, DIW Berlin, and Frankfurt for their comments and suggestions. The research was supported by Purkyně Fellowship of the Czech Academy of Sciences (MK) and by GACR grants 402/09/1340 (RB) and 13-29370S (MK). This paper uses data from SHARELIFE release 1, as of November 24th 2010 or SHARE release 2.5.0, as of May 24th 2011. The SHARE data collection has been primarily funded by the European Commission through the 5th framework programme (project QLK6-CT-200100360 in the thematic programme Quality of Life), through the 6th framework programme (projects SHARE-I3, RII-CT2006-062193, COMPARE, CIT5-CT-2005-028857, and SHARELIFE, CIT4-CT-2006-028812) and through the 7th framework programme (SHARE-PREP, 211909 and SHARE-LEAP, 227822). Additional funding from the U.S. National Institute on Aging (U01 AG09740-13S2, P01 AG005842, P01 AG08291, P30 AG12815, Y1-AG-4553-01 and OGHA 04-064, IAG BSR06-11, R21 AG025169), the Ministry of Education of the Czech Republic, as well as from various national sources is gratefully acknowledged (see www.share-project.org for a full list of funding institutions)