The Political Economy of Education Funding

In most countries, the government is the main provider of education services. Even when a private education sector exists, it is often subsidized. Given the substantial involvement of governments in the education sector and the importance of skill acquisition for individual and national welfare, understanding how societies allocate public resources for education is a crucial issue. The purpose of this chapter is to review positive models of public funding for education. Models reviewed in this chapter consist of a private layer and a political economy layer. In the private layer, firms and households make their decisions taking as given the public policies. In the political economy layer, voters or groups with conflicting interests determine the public policy, taking into account the private sector response to the policy. The questions addressed by the models in this chapter include: What is the majority preferred level of funding for public education when private options are available? How do various dimensions of household heterogeneity (e.g., income, age, ability, tastes) alter the political equilibrium? What is the level of public funding in each community when households can sort themselves into multiple communities? Why are large-scale vouchers in education so rare across the world? Why are public education expenditures as a fraction of GDP rising along the development path? The focus of this chapter is theory, but calibrated versions of the theory that rely on empirical work are also included. We also review the empirical evidence that has bearing on the theoretical models in this chapter.