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Investment in education overthrows the talent mismatch, which slows down economic development but benefits the children of the rich. That's the reason why the choice between public expenditure in education or redistribution depends on the income, Paola Profeta says in an article written with Michele Bernasconi

A new paper by Paola Profeta (Department of Policy Analysis and Public Management) and Michele Bernasconi (Università di Venezia Ca' Foscari) shows that when public investment in education and redistribution are a subject matter of a voting game between the poor and the rich, the preferred policies of the two groups might go in opposite directions; and as a result, the outcome of this interaction might ultimately retard economic progress if the rich dominate the political sphere. In particular, when the rich are politically influential, they prefer less public spending on education to maintain a high talent mismatch in the economy, which favors their children even when they are low-talented. This, in turn, generates efficiency costs that slow down economic growth.

In their paper entitled Public Education and Redistribution When Talents are Mismatched, forthcoming in European Economic Review (doi: 10.1016/j.euroecorev.2011.06.001) Profeta and Bernasconi investigate how the levels and the allocation of public spending by elected policy makers are determined in the political process. More specifically, they look into the way levels of funding for public education and redistribution are determined and what impact these have on inequality, growth and social mobility. In a novel politico-economic setup, the authors show that the poor prefer public education spending over direct redistributive schemes whereas the rich opt for redistribution, since public education makes it possible for the children of the poor to be recognized for their talent and find a job that matches their talent.

Starting from the fact that talent cannot be perfectly observed, authors argue that such an imperfect information environment lays the ground for talent mismatches. More explicitly, when talent is imperfectly observed, children from rich families have higher chances of finding a high-pay job even if they have low talent. This, in turn, implies that highly talented children of poor families have reduced chances of upward movement of their social status.

The presence of talent mismatches can be altered by the level of public spending, the authors argue. They claim that public education facilitates appropriate placement of social classes as it enhances the capacity of the society to correctly identify an individual's true talent, and therefore, reduces the probability of a mismatch.

Given the preferences of the rich and the poor, the authors study a political equilibrium of a voting game in which parents vote simultaneously on redistributive policies for themselves and public education for their children. Since public education offers the children of the poor the opportunity to be recognized for their talent, it augments exchange social mobility. This process naturally makes the poor more supportive of spending on public education over direct redistribution. On the other hand, an opposition from the rich emerges in the form of support for redistribution instead of public education so that a high degree of talent mismatches persists and exchange mobility is limited.

In addition, the authors show that mismatches, in the form of low-talent individuals having a high-talent position, result in efficiency costs that are detrimental to growth. As a consequence, more public spending on education increases economic growth not only because it enhances the level of human capital but also because it reduces the likelihood of talent mismatches.

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