One of the eight Millennium Development Goals of the United Nations
is to provide universal primary education. No convincing attempt has
been made towards this objective, though. So far, the academic
literature and policy implementation have focused on financing
higher education within industrial countries while fading out the
financing of primary education and of education within developing
This thesis contributes to the current literature by addressing these deficiencies. I develop a financing model for education at all level and in all countries. The model is built upon existing financing models of education and the experiences from microfinance – whose founder, Muhammad Yunus, received the Nobel Peace Prize 2006 – in order to overcome the barriers experienced in developing countries.
The basic mechanism of my financing model is as follows: Individuals can borrow money in order to finance their education and repay it after leaving school. Repayment obligations are a constant percentage of future income and last for a pre-defined period of time. Hence, repayment is income-contingent. The latter is smoothed across time as well as across individuals; beneficiaries pay more in fortunate times and successful graduates ultimately pay more than unsuccessful graduates. Just as human capital contracts are, this new form of contract is an equity-like instrument; investors have a share in the professional prosperousness of graduates. As a consequence, a risk-sharing outcome is achieved. Investors bear the risk of non-full cost recovery which is not only dependent on the graduate’s future income and the further design of the contract but also on the graduate’s morals of repayment. By creating human capital funds, the risk of investment can be diminished through diversification.
On the one hand, this financing model represents an alternative approach for sustainably financing education at all levels worldwide and prevents the discrimination of children for reasons other than ability. On the other hand, it is not about donation but about a social financial product which ultimately yields a positive return on investment.
Development Economics, Informal Credit Markets, Alternative, Financial Product, Microfinance, Education Funding, Contract Theory