Essays on the Roles of Financial and Higher Education Institutions in Macroeconomics

Abstract

The thesis consists of three essays in macroeconomics.

Chapter 1 analyzes the role of higher education in shaping income inequality and intergenerational mobility. I introduce a model where overlapping generations of heterogeneous households make college choices subject to a borrowing constraint and with heterogeneous colleges that maximize quality. First, in response to the observed rise in the returns to human capital in the U.S. since 1980, the model predicts an increase in income inequality, tuition, the dispersion of spending per-student across colleges, the exclusion of low-income students from top colleges, and the intergenerational elasticity of earnings (IGE), all consistent with the data. Second, I use the model to run counterfactuals. If all students received the same higher education, the income Gini and the IGE would decrease by up to 9% and 33%, respectively. Current government interventions---financial aid and transfers to colleges---decrease the Gini coefficient by 3% and the IGE by 12% compared to the laissez-faire.

Chapter 2 presents series on dispersion of expenditures per student, revenues and faculty per student across colleges from 1980 to 2016 in the United States using IPEDS data. Inequality across students have been slowly and steadily increasing over the period. The increase is half as large as the increase in annual household income inequality. The trend is driven by four-year colleges, both within and between non-profit private and public colleges. The average and the progressivity of government transfers to higher education institutions have sharply declined since 1980, especially at four-year institutions.

Chapter 3 develops a model where large financial intermediaries subject to systemic runs internalize the effect of their leverage on aggregate risk, returns and asset prices. Near the steady-state, they restrict leverage to avoid the risk of a run which gives rise to an accelerator effect. For large adverse shocks, the system enters a zone with high leverage and possibly runs. The length of time the system remains in this zone depends on the degree of concentration through a franchise value, price-drop and recapitalization channels. The speed of entry of new banks after a collapse has a stabilizing effect.