The Effects of Temptation on the Optimal Provision of Education

This paper provides a framework for analyzing optimal government transfers of education when individuals are tempted to underinvest in education. The government may devise a transfer using a combination of free compulsory education, vouchers and price subsidies. I show that government intervention is needed if there is no deadweight loss associated with taxation. If there is a loss from taxation, government intervention is needed only if the level of temptation is sufficiently high. For high levels of temptation, free compulsory education or vouchers are optimal, whereas price subsidies may be optimal for intermediate levels of temptation.