Public expenditure on education and skill formation: are there simple rules to maximise skills?

The ratio of skill to unskilled labour stocks in the economy is widely acknowledged to have an important role for development. Can education policy do anything to affect the evolution of this ratio? This paper shows that it can, and it also shows that the actual effect of education policy depends on the allocation rule of the budget across educational levels. The consideration of a stylised hierarchical education model allows us to develop analytical conditions under which the allocation rule favours the accumulation of skills. The analysis has implication for policy makers in developing countries, where skill formation is much needed, as it shows that observed allocation rules usually violate the maximisation condition by the assignment of higher than optimal resources to higher education.