Human Capital, Dynamic Inefficiency and Economic Growth

We investigate an endogenous growth overlapping generations model, which allows dynamic inefficiency and thereby has a role for the redistribution of resources from children to parents through bubbles, government debt or intergenerational altruistic transfers. The model has two sources of economic growth: human capital accumulation due to education investments and technological progress due to learning-by-doing externalities. Technological progress has two opposite effects in the model, a positive productivity effect on the final goods production and a negative erosion effect on human capital accumulation. These effects allow us to generate new results compared to models where the source of economic growth is technological progress or human capital accumulation alone. In particular, we show that bubbles can have a positive or negative effect on economic growth. We also consider the relationship between bubbles and two-sided intergenerational altruism. We show that bequests, gifts and bubbles cannot be operative in the same steady state if altruism is symmetric and households take the actions of other generations as given. Moreover, altruistic education investments are a perfect substitute for bequests if young agents do not face borrowing constraints. On the other hand, gifts from children to parents are an imperfect substitute for bubbles and bubbles eliminate gifts. In the end, we consider government debt and permanent budget deficits. The deficit has a maximum sustainable upper bound and it decreases the effect of debt on the economy. The calibration of the model to the postwar U.S. data shows that a maximum sustainable deficit/GDP ratio by the Ponzi game debt finance is around 2.1 %, which is slightly higher than the average realized U.S. deficit/GDP rati