Working Paper: CEPR ID: DP5686
Authors: Georg Kirchsteiger; Alexander Sebald
Abstract: Empirical evidence suggests that parents with higher levels of education generally also attach a higher importance to the education of their children. This implies an intergenerational chain transmitting the attitude towards the formation of human capital from one generation to the next. We incorporate this intergenerational chain into an OLG-model with endogenous human capital formation. In absence of any state intervention such an economy might be characterized by multiple steady states. A temporary public investment into human capital formation is then needed for a transition from a steady state with low human capital levels to one with a higher human capital level. Furthermore, it can be shown that even the best steady state is suboptimal when the human capital is privately provided. This inefficiency can be overcome by a permanent public subsidy for education.
Keywords: education; subsidy; human capital formation; indirect reciprocity
JEL Codes: H23; H52; I2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Parental education (I24) | Children's education expenditures (H52) |
| Children's education expenditures (H52) | Human capital formation (next generation) (J24) |
| Parental education (I24) | Human capital formation (next generation) (J24) |
| Parental education (I24) | Grandchildren's human capital formation (J24) |
| Low education steady states (I25) | Need for public funding for education (H52) |
| Private provision of education (H42) | Underinvestment in human capital (J24) |
| Optimal subsidy rate (H21) | Social planner's valuation of different generations (D15) |