Allocation of Resources in Educational Production: The Budget Puzzle

This study examines why educational expenditures seem to be unrelated to educational achievements according to empirical evidence. An overlapping generations model of budgetary and allocation decisions is presented in a political dynamic equilibrium framework. The model's key feature is that the size of the budget is predetermined according to majority voting, taking into account the subsequent allocation decisions. Then, funds are allocated either efficiently or inefficiently on a quality–quantity frontier in hiring teachers. Under these assumptions, this study highlights the implications of existing inefficiencies and demonstrates how they might explain stylized facts. First, the majority of voters may channel more funds to an inefficient education system, in case its return to the marginal units of funding is higher, which helps explain the difficulty in finding budget effects in the data. Second, in certain circumstances, the majority of voters may actually prefer an inefficient education system. Finally, other disadvantages of inefficient education systems, in addition to low educational achievements, include high income inequality and low teacher quality in the long run.