Maria Racionero

Optimal Redistribution with Heterogeneous Preferences for Leisure

This paper examines the properties of the optimal nonlinear income tax when preferences are quasi–linear in leisure and individuals differ in their ability and their preferences for leisure. The government seeks to redistribute income. It can perfectly observe the level of endogenous income but cannot observe either ability or preferences. The heterogeneity of preferences leads to problems of comparability between individual utilities which challenge the design of redistributive schemes. We analyze the consequences of adopting a utilitarian social welfare function where the government is allowed to give different weights to individuals with different preferences. Under this particular social objective and given the quasi–linearity of preferences, we are able to obtain closed–form solutions for the marginal tax rates and to examine the progressivity of the tax system according to the weights used.

Choosing the type of income-contingent loan: risk-sharing versus risk-pooling

This paper analyses the choice between risk-sharing and risk-pooling income-contingent loans for higher education of risk-averse individuals who differ in their ability to benefit from education and inherited wealth. The paper identifies the possible outcomes of a majority vote between the two income-contingent schemes and provides several examples where the risk-pooling income-contingent loan is preferred. The paper then discusses the implications on participation and voting outcomes if successful graduates are mobile and provides examples where the risk-pooling income-contingent loan remains being preferred. Risk-pooling schemes can however be prone to adverse selection problems, particularly if students are mobile. The paper explores the implications of allowing students to opt out of the risk-pooling income-contingent loan for a pure loan. It shows that risk-pooling income-contingent loans can be sustained even when some students opt out.

Voting on Income‐Contingent Loans for Higher Education

We consider risk-averse individuals who differ in two characteristics - ability to benefit from education and inherited wealth - and analyze higher education participation under two alternative financing schemes - tax subsidy and (risk-sharing) income-contingent loans. With decreasing absolute risk aversion, wealthier individuals are more likely to undertake higher education despite the fact that, according to the stylized financing schemes we consider, individuals do not pay any up-front financial cost of education. We then determine which financing scheme arises when individuals are allowed to vote between schemes. We show that the degree of risk aversion plays a crucial role in determining which financing scheme obtains a majority, and that the composition of the support group for each financing scheme can be of two different types.

Optimal redistribution with unobservable preferences for an observable merit good

This paper considers a government thatseeks both to redistribute income and to encourage or discouragethe consumption of a certain good. This good is assumed to beeither a merit or demerit good. Individuals differ in their exogenousincome and in their preferences for the merit good. The onlyvariable the government can perfectly observe is each individualsconsumption of the merit good. In order to account for meritgood considerations, we consider a modification of the utilitariansocial welfare function in which the government imposes uniformpreferences, despite the heterogeneous individual preferences,at a level which will depend on the merit or demerit nature ofthe observable good. We derive the optimal nonlinear redistributivepolicy and compare our results to the ones that would be obtainedunder a utilitarian social welfare function that respects theown preferences of individuals.

Tagging with Leisure Needs

We study optimal redistributive taxes when individuals differ in two characteristics—earning ability and leisure needs—assumed to be imperfectly correlated. Individuals have private information about their abilities but needs are observable. With different levels of observable needs the population can be separated into groups and needs may be used as a tag. We first assume that the social planner considers individuals should be compensated for their leisure needs and characterize the optimal redistributive policy, and the extent of compensation for needs, with tagging. We also consider an alternative social objective where individuals are deemed responsible for their needs.

Income Contingent Loans for Higher Education and Beyond

The role of income contingent loans (ICLs) as a risk-management device is being increasingly emphasized. Many countries have adopted ICLs to finance higher education and alternative uses have been proposed. In this chapter I first outline the main features of existing ICL schemes for higher education and discuss alternative designs. I then identify issues to be addressed when considering novel applications. Many existing ICL schemes for higher education imply large implicit subsidies: the interest rate is often highly subsidised and the shortfall from non-repayment is typically financed from general taxes. Increasing the share of the cost borne by successful graduates could help alleviate the negative consequences of current designs, but the extent to which this is feasible depends on whether there are significant moral hazard and adverse selection effects. These problems have traditionally seemed relatively minor in the higher education context but could be quite significant for some of the proposed applications.