A game-theoretic analysis of regional disparity and public education financing of two-level governments

Abstract

This paper studies the education policy choices in a decentralized economy with two levels of governments and regional income disparity.We employ a dynamic game model incorporating overlapping generations to analyze the optimal education spending of the central and local governments,and the subsequent effects of such financing arrangements on the dynamics of regional income distribution.We show that,whether the central government should provide public education and what level should be provided would depend on the extent of regional disparity.Only when the disparity is large could the provision of public education by the central government improve social welfare and reduce regional disparity over time.The optimal education expenditure of central government,however,does not monotonically increase with the extent of regional disparity.Finally,policy implications for China are discussed.