Externalities and fiscal policy in a Lucas-type model (original) (raw)

Human Capital accumulation, policy and growth

This paper examines the general equilibrium implications of the Decentralized Education (DE) and Centralized Public Education (CPE) systems for growth and welfare in an overlapping generations growth model, where the economy-wide human capital stock generates positive externalities for each individual. Under DE, each individual agent chooses his/her human capital to maximize his/her utility function by treating the economy-wide human capital as a public good. Under CPE the economy-wide human capital can be augmented by government intervention in the form of public expenditures on education …nanced by distortionary income taxes. A benevolent …scal authority chooses a uniform tax rate, and the associated expenditure on public education subject to the competitive decentralized equilibrium. It is shown that Centralized Public Education is welfare superior to decentralized education for all values of the preference parameter over total human capital bequests and initial human capital. Furthermore, CPE dominates DE for all but very high values of total human capital externalities. So, even when we abstract from equity considerations, Centralized Public Education may be supported on welfare grounds.

Optimal education and pensions in an endogenous growth model

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)

Human capital and economic growth in an overlapping generations model

Journal of Economics, 1995

The paper describes an aggregative optimal growth model, the essential features of which are that individuals are mortal and obtain their labor skill through educational training. The process of human capital formation is described by an education function which relates the pass rate to the educational expenditure per student. Two alternative scenarios, private and public education regimes, are separately investigated. Under the decentralized education regime, risk-neutral individuals borrow to finance their education when young. Under the centralized education regime, the cost of education is financed by taxes imposed on the workers in the economy, and the central government maximizes a long-term social target function. The equilibria of both regimes are analyzed and various comparative static results derived. It is shown that educational investment in a decentralized equilibrium is higher than that in the centralized steady state. We also establish that there exists a time discount rate at which or above which the decentralized per capita consumption exceeds that of the centralized steady state whereas for time rates of discount sufficiently near the population growth rate, the above result will be reversed.

Economic Policy in a Growth Model with Human Capital, Heterogenous Agents and Unemployment

Computational Economics, 2009

In this paper we present an endogenous growth model with human capital, heterogenous agents and unemployment. Two types of households are considered. One household acquires human capital or skills through education while the other household remains low-skilled. Sustained growth is the result of human capital accumulation which is a function of the existing human capital employed in the educational sector and of public spending for teaching materials. Both households are affected by unemployment and, if so, receive unemployment benefits. The government levies an income tax and uses its revenues to pay unemployment benefits, to finance transfers to the low-skilled household and to finance human capital accumulation. The paper studies growth and welfare effects of economic policy and presents a stability analysis of the model.

Returns to education, indeterminacy, and multiple balanced growth paths

2014

We investigate the existence, multiplicity, and indeterminacy of balanced growth paths in an extended Lucas model incorporating physical capital inputs, human capital externalities, and decreasing returns to scale in education. With physical capital in education and increasing social returns in production, social returns to scale in education should be decreasing for the existence of balanced growth; indeterminacy can arise for weaker human capital externalities; and multiple balanced growth paths may emerge with perhaps distinctive dynamic properties: The high-growth steady state may be indeterminate, while the low-growth steady state may be determinate, but not vice versa.

Optimal accumulation in an endogenous growth setting with human capital

Journal of Economic Theory, 2007

This paper considers a three-overlapping-generations model of endogenous growth wherein human capital is the engine of growth. It first contrasts the laissez-faire and the optimal solutions. Three possible accumulation regimes are distinguished. Then it discusses a standard set of tax-transfer instruments that allow for decentralization of the social optimum.

Human capital, market structure and taxation in a growth model with endogenous technical progress

Journal of Macroeconomics, 1991

This paper provides a growth model with endogenous technical progress, the rate of which is neither parametrically fixed nor exploding. Its level depends on the allocation of capital and labor between educational and other purposes. If a perfect market for the use of technology exists, viability and optimality of perfect competition can be ensured through lump-sum taxes. If there is no market for the use of technology, an externality arises for which a tax subsidy system is derived that influences the rate of technical progress and allows for first best growth and a balanced government budget simultaneously.