This paper examines funding policies for education in a model with skilled
and unskilled workers. We investigate how changes in the income gap
between them affect optimal financing. The results are as follows: First, for a
very large income gap, pure public financing is optimal in a unique
steady-state. Second, for a large income gap, we find out a case in which no
steady-state exists and partial private financing is optimal. Third, for a small
income gap, partial private financing is optimal in multiple steady-states.
Finally, for a very small income gap, partial private financing is optimal in a
unique steady-state. The reason for these results is that pure public financing
improves equity but causes inefficient fertility choice. Thus, from this trade-off
between equity and efficiency, pure public financing is optimal when inequality
is very high.