Education, Agglomeration and Fiscal Competition

This paper analyzes fiscal competition to attract mobile students within a federation, taking into account both direct positive effects of tertiary education on local output and indirect effects on the workplace choices of high-skilled graduates. The policy analysis of subsidies for higher education is embedded in a model of labor mobility and Marshallian agglomeration externalities which may give rise to a core-periphery pattern. The main implications of the analysis are: First, the higher the positive impact of student enrollment on aggregate output is, the higher education subsidies are. Second, the stronger agglomeration externalities of high-skilled employment are, the greater the differences between education subsidies across regions