2009, Efficient subsidization of human capital accumulation with overlapping generations and endogenous growth

Abstract: This paper studies second-best efficient policies for human capital in an OLG model with endogenous growth. When young, individuals decide on education, saving and nonqualified labour. When old individuals supply qualified labour. Growth equilibria are inefficient in laissez-faire because government expenditures have to be financed by distortionary taxes. The inefficiency is exacerbated if selfish individuals externalize the positive effect of education on descendents' productivity. It is shown to be second best to subsidize human capital accumulation even relative to the first best. This holds for selfish individuals at balanced growth and it equally holds for altruists in the dynasty's first generation