Why does education expenditure differ across countries? The role of income inequality, human capital and the inclusiveness of education systems

This paper provides a simple model of hierarchical education to study the political determinants of the public education budget and its allocation between different stages of education (basic and advanced). The model integrates private education decisions by allowing parents, who are differentiated according to income and human capital, to opt out of the public system and enrol their offspring at private universities. Majority voting decides the size of the budget allocated to education and the expenditure composition. The model exhibits a potential for multiple equilibria and ‘low education’ traps. Income inequality, the distribution of the adult population’s human capital and the inclusiveness of the education system play a fundamental role in deciding the equilibrium public education budget and its allocation between different tiers of education. The main predictions of the theory are broadly consistent with cross-country evidence collected for OECD countries and help to explain why some OECD countries, such as Italy, seem to remain stuck in a ‘low education’ equilibrium.