Distributional effects of educational improvements: Are we using the wrong model?

Measuring the incidence of public spending in education requires an intergenerational framework distinguishing between what current and future generations—that is, parents and children—give and receive. In standard distributional incidence analysis, households are assumed to receive a benefit equal to what is spent on their children enrolled in the public schooling system and, implicitly, to pay a fee proportional to their income. We show that, in an intergenerational framework, this is equivalent to assuming perfectly altruistic individuals, in the sense of the dynastic model, and perfect capital markets. But in practice, credit markets are imperfect and poor households cannot borrow against the future income of their children. We show that under such circumstances, standard distributional incidence analysis may greatly over-estimate the progressivity of public spending in education: educational improvements that are progressive in the long-run steady state may actually be regressive for the current generation of poor adults. This is especially true where service delivery in education is highly inefficient—as it is in poor districts of many developing countries—so that the educational benefits received are relatively low in comparison with the cost of public spending. Our results have implications for both policy measures and analytical approaches.