Optimal education and pensions in an endogenous growth model

By Elena Del Rey and Miguel Lopez-Garcia

http://d.repec.org/n?u=RePEc:cor:louvco:2009079&r=dge”

It is well known that, in OLG economies with life-cycle saving and exogenous growth, competitive equilibria will in general fail to achieve optimality and may even be dynamically inefficient. This is a consequence of individuals accumulating amounts of physical capital that differ from the level which would maximize welfare along a balanced growth path (the Golden Rule). With human capital, a second potential source of departure from optimality arises, to wit: individuals may not choose the correct amount of education investment. However, the Golden Rule concept, widely used in exogenous growth frameworks, has not found its way into endogenous growth models. In this paper, we propose to recover the Golden Rule of physical and also human capital accumulation. The optimal policy to decentralize the Golden Rule balanced growth path when there are no constraints for individuals to finance their education investments is also characterized. It is shown that it involves positive pensions and negative education subsidies (i.e., taxes).

Interesting idea to check out the Golden Rule for human capital with the counterintuitive result that education should be taxed. The reason is that as individuals get more educated, it exerts a negative externality on the others to raise more physical capital to maintain the interest rate. Equilibria off the Golden Rule, however, are welfare improving with subsidies to education. Is the Golden Rule then the right welfare criterion?

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