Heterogeneous Individuals and the Optimal Level of Higher Education

We examine the effects of public funding on higher education within a game-theoretical framework, in which universities choose students according to their abilities to learn, whereas to widen the opportunity of receiving higher education, the tuition fees are partially financed by a graduate-tax subsidy system. We find that when individuals are impatient, partial public financing of higher education results in an overinvestment in higher education, which is, however, desirable in terms of improved access.