Public Funding of Higher Education when Students and Skilled Workers are Mobile

The interregional mobility of high-skilled workers may induce an underinvestment in local public higher education when subfederal entities independently decide on education expenditures to maximize local output. This well-known result, which is due to a positive interregional spillover of local education policy when some individuals emigrate upon graduation, can reverse once taking student mobility into account. When local education policy attracts foreign students, a negative spillover takes place, and the actual discrepancy between decentralized policy and the global-output-maximizing solution depends on the relative size of the two spillovers. The paper also presents a variant of the model with local governments' objectives resting exclusively upon natives' utility.