Fiscal externalities arise if subsidies to higher education raise future net fiscal revenues. We investigate in which countries fiscal externalities provide a justification for increasing subsidies to higher education. First, we show that the marginal fiscal recovery rate, i.e. the ratio of the...

Although public appropriations to higher education and tuition rates are set under alternative arrangements, the optimal allocation is readily achievable. The decentralized linear-subsidy case produces an externality that reduces joint welfare below the centralized (first-best) case, but when...