This paper describes a contract theory of public finance of college education that explains why everyone pays for the college education of a lucky minority. The contract provides gambles that families desire. Optimizing the contract determines the taxes paid by all members of society, fees paid by those whose children go to college, the fraction of children who are admitted to college, and the quality of college education. Changes in wealth lead to changes in taxes and admissions, but fees and quality are invariant. The practice of using a cutoff level of precollege achievement to determine admission to college is justified by the theory.

Recent papers on the of involve preferences of the sort introduced by Milton Friedman and Leonard Savage (1948).1 Given the choice between undergoing a particular gamble in wealth and possessing the mathematical expectation of the payoffs of the gamble, the consumers in these studies may prefer the gamble. The presence of such risk-loving preferences is inferred from two well-established facts: life is an indivisible commodity in the models, and indivisibility leads to preference for gambles. The former fact is made clear by Philip Cook and Daniel Graham. The latter was first noted by Yew-Kwang Ng (1965) and is widely known. In spite of the obvious connection, the implications of risk-loving tastes in this area have not been explored. This paper examines some implications of such risk loving. The idea that indivisibility produces Friedman-Savage preferences and that such preferences create a demand for gambles is extended in Section I to a theory of demand for indivisible goods and derived demand for associated optimum gambles. This theory suggests that the price of an indivisible good will not compensate for possessing or not possessing the good. Section II applies the demand theory to an equilibrium model of labor supply that is relevant to the determination of the value of life. In this model, the wage diflerential is useful in guiding policy toward public risks, in spite of the fact that the differential is not compensating. I. Demand for Gambles and Demand for Goods

This paper describes a contract theory of public finance of college education that explains why everyone pays for the college education of a lucky minority. The contract provides gambles that families desire. Optimizing the contract determines the taxes paid by all members of society, fees paid by those whose children go to college, the fraction of children who are admitted to college, and the quality of college education. Changes in wealth lead to changes in taxes and admissions, but fees and quality are invariant. The practice of using a cutoff level of precollege achievement to determine admission to college is justified by the theory.

Developing democracies are experiencing unprecedented increases in primary and secondary schooling. To identify education's long-run political effects, we use a difference-in-differences design that leverages variation across local government areas and gender in the intensity of Nigeria's 1976 universal primary education reform—one of Africa's largest ever educational expansions—to instrument for education. We find large increases in basic civic and political engagement: better educated citizens are more attentive to politics, more likely to vote, and more involved in community associations. The effects are largest among minority groups and in fractionalized areas, without increasing support for political violence or own-group identification.

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