Externalities and fiscal policy in a Lucas-type model (original) (raw)
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This paper devises a fiscal policy by means of which the first-best optimum equilibrium is attained as a market equilibrium in the Uzawa-Lucas model when average human capital has an external effect on productivity. The optimal policy requires the use of a subsidy to investment in human capital which can be financed by a tax on labor income. Lump-sum taxation is not required to balance the government budget either in the steady state or in the transitional phase. Physical capital income should not be taxed. Alternatively, the optimal growth path can be attained by means of a subsidy to human capital.
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This paper presents a three-sector model of endogenous growth with physical and human capital accumulation. We integrated the two extreme approaches used in the preceding literature to design the process of human capital accumulation. In this paper, the accumulation of human capital is a home production in which individuals combines their non-working time with market educational goods. This new characterization of human capital accumulation provides a framework that permits a complete fiscal policy analysis. Unlike the preceding literature, we can analyze how fiscal policy affects to all individuals' margins of decision regarding to human capital accumulation. We obtain that the way in which individuals combine educational goods and schooling time determines the impact that fiscal policy has in both the stability property of the equilibrium and in the long-run growth rate.
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Journal of Economic Theory, 2013
In OLG economies with life-cycle saving and exogenous growth, competitive equilibria in general fail to achieve optimality because individuals accumulate amounts of physical capital that differ from the one that maximizes welfare along a balanced growth path (the Golden Rule). With human capital, a second potential source of departure from optimality arises, related to education decisions. We propose to recover the Golden Rule of physical and also human capital accumulation. We characterize the optimal policy to decentralize the Golden Rule balanced growth path when there are no constraints for individuals to finance their education investments, and show that it involves education taxes. Also, when the government subsidizes the repayment of education loans, optimal pensions are positive.
Optimal fiscal policy in the Uzawa-Lucas model with CES production
International Advances in Economic Research, 2004
This paper devises an endogenous growth model with human capital in the Uzawa-Lucas framework in which the average human capital has a positive external effect on the goods sector. Unlike previous works, this paper assumes that output is produced with a CES technology and analyzes the existence, uniqueness, and stability of equilibrium. Also, a fiscal policy is devised that is capable of providing the required incentives to optimize the competitive equilibrium. In order to correct the market failure caused by the externality, the authors introduce a subsidy to human capital and analyze how it can be financed in an optimal way. Some simulation results are presented.(JEL 041, E62)