Higher education funding reforms in England: the distributional effects and the shifting balance of costs



funding for HE between the public sector and the private sector. We find that
universities gain financially from the reforms, both through additional taxpayer
funding and contributions from graduates.

Our paper contributes to the existing literature in a number of ways. First, it analyses
quantitatively a HE funding policy that is complex and multi-faceted. There are a
number of existing studies on the empirical effects of HE policies, contained for
example in Keane and Wolpin (1997), Heckman, Lochner and Taber (1998), Lee
(2001), and Gallipoli, Meghir and Violante (2006). However, the overriding
contribution of these papers is in analysing HE policies within partial or general
equilibrium frameworks, and in so doing they consider straightforward HE
interventions, such as tuition subsidies. Whilst we do not use a structural framework,
we add to this (largely US literature) by considering the quantitative effects of a
relatively more complex set of HE reforms.

Second, our paper adds important empirical evidence to the literature that emphasises
the potentially valuable role of education policies with insurance elements, such as
income-contingent loans. The concept of an ICL as a means to fund human capital
investment dates back to Friedman (1955). Since then, numerous works such as
Nerlove (1975), Barr (1993), Greenaway and Haynes (2003), and Chapman (2005)
have discussed their potential usefulness as a source of funding for HE. Our work
adds empirical evidence on the likely distributional effects of such policies to this
literature. Moreover, there is a large literature on the background to the new HE
reforms in England, a comprehensive summary of which is contained in Barr and
Crawford (2005). However, this paper is the first to provide an in-depth analysis after
the reforms have been implemented, of how they may affect different graduates
differently and of their implications for the public finances.

Third, at the heart of the reforms is the provision of built-in insurance against an
inability to repay loans, thus giving central importance to the role of uncertainty in
returns to human capital investments. Moreover, in analysing the distributional effects
of the new reforms for graduates, we implicitly acknowledge the key role of
heterogeneity in returns to higher education. This initially gained prominence through
important works such as Levhari and Weiss (1974), Eaton and Rosen (1980) and



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