Public expenditure on education and skill formation: is there a simple rule to maximize skills?

The ratio of skilled-to-unskilled labour stocks in the economy is widely acknowledged to have an important role for development. Can education policy affect the evolution of this ratio? This paper shows that it can: it also shows that the effect of education policy, for a given budget size, depends on the allocation rule across educational levels, particularly in the presence of systemic inefficiency. Using a stylized hierarchical education model, the theoretical conditions under which the allocation rule would favour the accumulation of skills are determined. The analysis has implication for policymakers in developing countries, where skill formation is much needed, because it shows that their allocation rules usually violate the maximization condition by assigning higherthan- optimal resources to higher education.