The paper considers the effects of a national tuition-reduction policy on schooling and earnings, accounting for general-equilibrium effects on skill prices. Standard policy evaluation practices are likely to be misleading about the effects of tuition policy on schooling attainment and wage inequality. It is shown that these practices lead to estimates of enrollment responses that are more than ten times larger than the long run general-equilibrium effects. Both the gross benefits of the program and the tax costs of financing the treatment as borne by different groups are considered. An empirically justified, dynamic, overlapping-generations, general-equilibrium framework for the pricing of heterogeneous skills is presented. It is based on an empirically grounded theory of the supply of schooling and post-school human capital, where different schooling levels represent different skills.
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Bibliography: Heckman, James J., Lance Lochner and Christopher Taber. "General Equilibrium Treatment Effects: A Study of Tuition Policy." NBER Working Paper 6426. National Bureau of Economic Research, Cambridge, MA.
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