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Poutvaara, Panu; Kanniainen, Vesa (2000): Why invest in your neighbor? Social contract on educational investment. In: International Tax and Public Finance, Vol. 7, No. 4-5: pp. 547-562
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It may be in the interest of low-ability individuals to subsidize theeducation of high-ability individuals. The sufficient conditions aresurprisingly mild: positive externalities in education andcomplementarity in production between human capital and labor suppliedby the low-ability individuals. However, tax competition and the freemobility of the educated give rise to time-inconsistency and free-ridingproblems which render such a social contract infeasible and result in asuboptimally low investment in education.