Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth

32 Pages Posted: 15 Dec 2009

See all articles by Wolfram F. Richter

Wolfram F. Richter

TU Dortmund University; CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

Christoph Braun

University of Dortmund - Ruhr Graduate School in Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2009

Abstract

This paper studies second-best policies in an OLG model in which endogenous growth results from human capital accumulation. When young, individuals decide on education, saving, and nonqualified labour. When old, individuals supply qualified labour. Growth equilibria are inefficient in laissez-faire because of distortionary taxation. The inefficiency is exacerbated if selfish individuals externalize the positive effect of education on descendents' productivity. It is shown to be second best not to distort education if the human capital investment function is isoelastic. If the function is not isoelastic, a case is made for subsidizing education even relative to the first best.

Keywords: OLG model, endogenous growth, endogenous labour, education and saving, intergenerational externalities, optimal taxation

JEL Classification: H21, I28, J24

Suggested Citation

Richter, Wolfram F. and Braun, Christoph, Efficient Subsidization of Human Capital Accumulation with Overlapping Generations and Endogenous Growth (December 2009). Available at SSRN: https://ssrn.com/abstract=1522697 or http://dx.doi.org/10.2139/ssrn.1522697

Wolfram F. Richter (Contact Author)

TU Dortmund University ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Institute for the Study of Labor (IZA)

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Christoph Braun

University of Dortmund - Ruhr Graduate School in Economics ( email )

Dortmund, 44221
Germany

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