Financing Lifelong Learning Miguel Palacios phenomenon of adverse selection<sup>and(3)the negative effect they can have in the labor</sup> market.

The capacity of the investor to<sup>determinea student'sincome and the capacity of the</sup> investor to collect payments<sup>fromthe student are extremely relevantforthe successof</sup> HCCs in a country. A student's<sup>income can be estimatedif there is a well-developed tax-</sup> collection agency to which citizens<sup>report accurateincomeinformationor if a social</sup> insurance or pension fund system<sup>exists that uses incomeinformation to determine</sup> benefits for individuals. In<sup>particular,whena significantamount of graduatesend up</sup> working for government, the<sup>problemof determining income isgreatly reduced.' 5Still,</sup> students have an incentive to<sup>hide theirincomein order to decreasetheir payments,and</sup> they are likely to be successful<sup>tosome extent.</sup> To aid investors, the tax-collection<sup>agency can collect paymentsfor investors.Wherea</sup> developed tax-collection system<sup>alreadyexists, the marginalcost of collectingpayments</sup> on Human Capital Contracts<sup>should presumably below.Given the Australianexperience</sup> with income-contingent loans<sup>(see Chapman (1997)),which requiresthesame operations</sup> from tax-collection agencies,<sup>costscan be around1% of theamount collected. This</sup> arrangement, which I call _Institutional_<sup>_Human Capital Contracts_(SeePalacios(2001)),</sup> would operate in much the same<sup>way that private pension funds collect money in</sup> countries such as Chile, with<sup>the differencebeing that the state would deposit payments</sup> in investors' accounts, rather<sup>thanin individuals'accounts.</sup> The next issue related to determining<sup>a student's income and collectingpaymentsfrom</sup> students has to do with the<sup>proportion of graduateswho leave the country.Presumably,</sup> the feasibility of determining<sup>incomeandcollecting paymentsdecreaseswhen students</sup> leave the country. To address<sup>this problem, certain conditions can be placedon the</sup> contract in case emigration<sup>takes place,such as demandingan immediatepayment.'The</sup> best alternative for facing this<sup>problem in thelong run is the establishmentof</sup> multinational treaties that allow<sup>foreigncountriesto collectpaymentsfromstudentswho</sup> emigrate. Barr (2001) even suggests<sup>that entities like the World Bank couldaid in the</sup> creation and operation of such<sup>a system.A system that solves theproblem of collecting</sup> payments from students who<sup>emigratewould allow studentsto benefit from higher</sup> foreign income and would benefit<sup>the countrieswhere thestudentengagedin the HCCs</sup> by returning part of the extra<sup>value derived fromthe studentworking abroad.</sup> The second important obstacle<sup>to implementing HCCs is adverseselection.Adverse</sup> selection occurs when investors<sup>are unableto discriminate betweenfuture highearners</sup> and low earners.<sup>17</sup> If the investor<sup>is unable to discriminate, future highearners willfeel</sup> that a HCC is very expensive,<sup>and futurelow-earnerswillsee it as cheap.As a result,</sup> students who see themselves<sup>with high future earnings willnot join thesystem and</sup>

> 5 For example, Colclough (1990)<sup>statesthat65%of Botswana's graduateswork for government.</sup> **16** Several loan programs in<sup>fact do this.For example,Colombia's Colfuturoand Venezuela's</sup> FondoAyachucho loans require<sup>such conditionsfrom students.</sup>

> 17 This occurs if there is asyrnmetric<sup>information.The processexplainedhere closely resembles Ackerlof's</sup> famous exposition (1970) in<sup>"The market for the Lemons".</sup>

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