Discussion Paper Details

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Title: Investments into Education - Doing as the Parents Did

Author(s): Georg Kirchsteiger and Alexander Sebald

Publication Date: May 2006

Keyword(s): education subsidy, human capital formation and indirect reciprocity

Programme Area(s): Public Economics

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.

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Bibliographic Reference

Kirchsteiger, G and Sebald, A. 2006. 'Investments into Education - Doing as the Parents Did'. London, Centre for Economic Policy Research.