Why education expenditures differ across countries? The role of income inequality, human capital, and the inclusiveness of the education system

This paper provides a simple model of hierarchical education to study the political determination of the public education budget and its allocation between different stages of education (basic education and advanced education). The model integrates private education decisions by allowing parents, who are differentiated according to income and human capital, to opt out from the public system and to enrol their offspring at private universities. Majority voting decides the size of the budget allocated to education and the expenditure composition. We find that the presence of a large private education sector depends positively on income inequality. On the contrary, income inequality negatively affects the level of public education expenditure. The allocation between different stages of education depends on the adult population’s human capital and on the inclusiveness of the education system. The main predictions of the theory are broadly consistent with cross-country evidence collected for OECD countries. Our comparative analysis identifies four clusters of countries whose education regimes might be explained by our model’s results. In addition, the theory helps explain why some OECD countries, like Italy, seem to remain stuck in a “low education†trap.