4 Educational Finance

Investments in education cost money, and a fourth strand of the economics of education deals with topics of the financing of educational investments. There is a host of policy options in educational finance, ranging in a continuum between state and market financing (cf., e.g., Jimenez, Psacharopoulos and Tan 1986; Oosterbeek 1998; Wolter 2001). These alternatives raise questions of equity and efficiency of the public subsidisation of education (Jimenez 1986). Furthermore, with public financing the degree of educational spending often depends on local public choices (Falch and Rattsø 1999). The evidence of positive effects of competition in the educational systems has also implications for the efficiency of educational finance: Several studies show that competition between private and public schools – complemented by a large share of public financing of both types of school – yields the most effective educational systems (see for example Woessmann 2007). Educational vouchers are an appropriate tool to introduce demand-side funding mechanisms on all levels of education (see for example Messer and Wolter 2009). Demographic patterns – and especially a higher share of the elderly within the population – have also impacts on public educational budgets (see Cattaneo and Wolter 2008). Psacharopoulos (2008) discusses different funding mechanisms in higher education.

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4a Public financing
4b Private financing (incl. tuition fees)

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