Altruism, Liquidity Constraint, and Investment in Education

• Author: TAKASHI SATO,KIMIYOSHI KAMADA,TOSHIHIRO IHORI
• Published date: 01 April 2017
• DOI: http://doi.org/10.1111/jpet.12208
• Date: 01 April 2017

ALTRUISM,LIQUIDITY CONSTRAINT,AND INVESTMENT

IN EDUCATION

TOSHIHIRO IHORI

National Graduate Institute for Policy Studies

KIMIYOSHI KAMADA

Chukyo University, Economics

TAKASHI SATO

Shimonoseki City University

Abstract

In Japan and other East Asian societies, household educational expen-

ditures per child (especially private tutoring expenditures) have in-

creased sharply, perhaps to an excessive degree. This paper suggests a

rationale for many families to invest extensively in education, whereas

other relevant literature rarely addresses the possibility of excessive

educational investment. Introducing altruism and liquidity constraints

into a model in which parent and child interact for determining in-

vestment in the child’s education, we show that educational investment

may be excessive unless the family is profoundly liquidity-constrained.

Our result extends previous findings incorporating the Samaritan’s

Dilemma. We also discuss public policy designed to remedy the inef-

ficiency in educational investment.

1. Introduction

Many societies now witness an aging population due to falling fertility rates and in-

creasing longevity. Japan, in particular, provides an extreme case of fertility rates falling

dramatically, and it is often pointed out that one crucial factor in this trend is the in-

creasing cost of educating a child. As shown in Figure 1, the ratio of Japanese house-

holds’ educational expenditure to disposable income increased until 1990, stabilized

during the following decade and has subsequently increased since the early 2000s. At

the same time, the number of children per household has fallen sharply since the 1980s,

implying that educational expenditures per child have increased greatly in Japan. In

addition, private supplementary tutoring accounts for a large share of educational ex-

penditures. This phenomenon prevails elsewhere in East Asia including South Korea,

Toshihiro Ihori, National Graduate Institute For Policy Studies, 7-22-1 Roppongi, Minato-ku, Tokyo,

Japan (email: ihori@grips.ac.jp). Kimiyoshi Kamada, School of Economics, Chukyo University, 101-

2 Yagoto-Honmachi, Showa, Nagoya, Japan (email: kkamada@mecl.chukyo-u.ac.jp). Takashi Sato,

Department of Economics, Shimonoseki City University, 2-1-1 Daigakucho, Shimonoseki, Japan (email:

ryux555@air.ocn.ne.jp).

Received April 29, 2016; Accepted April 29, 2016.

C2016 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 19 (2), 2017, pp. 409–425.

409

410 Journal of Public Economic Theory

2

2.5

3

3.5

4

4.5

5

1.64

1.66

1.68

1.70

1.72

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1.76

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1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

The ratio of educational expenditure to disposable income (%)

The number of children

The average number of children over households with at least one child

The ra tio o f ed ucatio nal expe nditure to disp osable in come (a verage o ver wor kers' h ousehol ds)

Figure 1: Household educational expenditure and the number of children in Japan. Source:

Ministry of Internal Affairs and Communications (Japan), Family Income and Expenditure Survey;

Ministry of Health, Labour and Welfare (Japan), Comprehensive Survey of Living Conditions.

Taiwan, and Hong Kong (Bray and Kwok 2003).1That private tutoring is freely chosen

by households suggests that they invest actively in education. Thus, it is important to in-

vestigate the positive and normative aspects of households’ decisions concerning private

educational investment.

The rate of return on investment in education should provide useful information

for evaluating whether households overspend on private education. Based on Japanese

cross-sectional data from 1986 to 1995, Arai (2001) found that the average internal rate

of return on a university education is 5.93%–6.42% for women and 4.81%–5.36% for

men; likewise for Japan, the Cabinet Office (2005) has estimated that the rate of return

on a university education for men born in 1975 was 5.7%. In other countries, many

studies have been conducted since the late 1950s. Psacharopoulos and Patrinos (2004),

who reviewed empirical results for a variety of countries, summarized that the world av-

erage rate of return on an additional year of schooling is 10%, which is above average

for high-income countries of the OECD. According to cross-country analysis by Trostel,

Walker, and Wooley (2002), the rate of return on schooling was below 4% for several

countries, including Germany (West), The Netherlands, Norway, Sweden, and Canada.

These results make it difficult to conclude whether the rate of return on investment

in education is disproportionately high or low relative to investment in physical cap-

ital. However, we should note that several factors have been identified as causing an

upward bias in estimations of the rate of return on educational investment, such as the

1Tansel and Bircan (2006) state that there is a growing demand for private tutoring in Turkey as well

as many other countries.