The Political Economy of Redistribution Through Higher Education Subsidies

Abstract

Hansen and Weisbrod (1969) find that subsidies for higher education redistribute income from the poor to the rich. I examine the historical debate on redistribution through higher education subsidies and provide more recent evidence that the system does result in a negative redistribution of income. I then review the literature on political economy of selective welfare programs, with a particular emphasis on programs like higher education, which benefit middle income and upper income groups at the expense of the poor. The paper explains and extends the Fernandez and Rogerson (1995) model which demonstrates how a program of negative income redistribution (poor providing subsidies for the rich) could be approved by a majority of voters in a society. The paper then provides an empirical test of this model analyzing panel data from 1984 to 1999 from the American states. The two stage least squares results indicate a negative relationship between inequality and appropriations to higher education—as inequality goes up, states will provide less money for higher education. This provides initial support for the Fernandez and Rogerson model.