On education as a risky asset: Should the government support the working students?

One of the most important fields of government intervention in the economy is the field of education. In most countries, the government directly manages the provision of education up the secondary level and strongly finances higher-education activities, a policy that is seen as being useful to stimulate growth. Thus, a crucial issue from a socio-economic planning perspective is how to allocate the budget resources efficiently. A key argument in favour of government expenditure is that more education in a society today leads to higher income and tax receipts tomorrow. It follows that the initial public investment is somehow recovered at a later point in time. This argument, however, is typically based on the empirical evidence regarding the average wage returns for individuals who behave like in a standard human-capital model, i.e. individuals who stop schooling and start working. An understudied issue is whether it holds for working students that nowadays represent a significant share of the student population. This paper fills this gap in the literature by providing an economic rationale for government support to working students (e.g. special rights for these students while in higher education). It does so by performing a novel investigation of the return-risk link in education. The way in which it accounts for uncertainty due to pure individual luckiness is unique in the literature.