Abstract:

This paper explores the government's role in higher education policy within a dual economy, where skilled workers invest in higher education while unskilled workers do not. The novel question is whether the government should refrain from subsidizing higher education while imposing regulations, supporting a restricted, elitist system. I demonstrate that under an optimal linear income tax, government favors a restricted system. Through simulations, I show that this result also holds under a nonlinear system. Concerning developing countries, their preference for a restricted system is even more pronounced, and if trapped in a low equilibrium, international institutions can provide enhancing social welfare subsidies.