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| Effects of Education Finance on Household Human Capital Investment: Facts, Mechanisms, and Policy Implications |
| LIU Wenjie, SONG Hong, CHEN Shiyi
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| School of Economics, Fudan University |
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Abstract Education is important for the accumulation of human capital and the realization of high-quality development. Since the 2008 global financial crisis, to improve the quality of its population, China has used public finance to expand its educational input regardless of the economic growth downturn and the disappearing “demographic bonus.” As an instrument of fiscal policy, education finance can alleviate households' educational burdens. However, the last decade has witnessed the large-scale expansion of the out-school education market, thereby increasing households' education expenditures. Therefore, this study investigates whether the goals of increasing human capital input and alleviating households' educational burdens in circumstances wherein out-school education has rapidly expanded in recent years can be compatibly achieved through education finance in China.
Using the education input-output model framework, this study modifies the traditional variable elasticity of substitution education production function via which in-school and out-school education are distinguished. In this model, two parameters are crucial to the substitution elasticity between governmental and household education inputs: the contribution of in-school education to human capital accumulation and the characteristic differences between in-school and out-school education. It is important to assess in what way and to what extent these two factors affect the substitution elasticity in reality.
To empirically investigate whether the relationship between the governmental and household education inputs is substitutional or complementary, this study assesses how education finance input affected household education input between 2009 and 2017 in China. We match the micro-level household data from CFPS investigations to the macro-level provincial data from China Statistical Yearbooks, China Education Statistical Yearbooks, and China Educational Expenditure Statistical Yearbooks. The sample includes individuals from the pre-primary to undergraduate stages. We find that the governmental and household education inputs were complementary rather than substitutional in our sample. This result also passes several robustness tests.
Based on the benchmark results, we further analyze the reasons why the two education inputs were complementary. First, we find that people tend to opine that, compared with in-school education, out-school education more significantly contributes to the accumulation of human capital. Second, the characteristic difference between in-school and out-school education increases the ratio of out-school education input for households. Heterogeneity analyses reveal that the effects of education finance inputs on household education inputs are greater for individuals in the stages of compulsory education.
The study findings have strong policy implications. For the stages of compulsory education, a “dual alleviation” policy for homework and out-school tutoring burden was implemented in 2021; we expect that this policy will render the governmental and household education inputs less complementary in these stages. To ensure that education finance in China achieves the compatible goals of constructing a high-quality education system and alleviating household educational expenditures, it may be beneficial to reduce the substitution elasticity by regulating the out-school education market and rationally recognizing the contribution of in-school education to the accumulation of human capital.
This paper makes several contributions to the literature focusing on education finance and household education investments. First, this study explores the economic mechanisms underlying how education finance influences household educational investments based on the high-speed expansion of China's out-school education market. Second, based on the education input-output model, this study improves the traditional education production function, emphasizes the importance of substitution elasticity between governmental and household education inputs, and highlights that it is crucial to alleviate the burden of household expenditure while maintaining the growth of education finance. Future studies should investigate whether the in-school input overwhelms the out-school input in terms of the contribution to human capital accumulation and whether education finance can effectively substitute household education input once China's out-school education market is regulated.
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Received: 24 August 2021
Published: 12 October 2022
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