Education, moral hazard, and endogenous growth
AbstractWe build an overlapping generations model of endogenous growth driven by human capital formation. Young people differ in their innate abilities, but these differences are not known even by the individuals themselves when they are going through the process of education, so that there are no adverse selection problems. The probability of successful completion of schooling depends on both innate abilities and effort level. Moral hazard arises because effort is not observable. Successful students become skilled workers while unsuccessful ones become unskilled workers. A utilitarian government that cares about income distribution within each generation transfers income from the rich (skilled workers) to the poor (unskilled ones). This is anticipated by the young pupils and reduces incentive for hard work. This results in a lower rate of graduation, and has an adverse effect on the growth rate of human capital and output. Comparative statics results across balanced growth paths are derived. The parameters of interest are the students' rate of time preference, their degree of effort aversion and the relative price of the skill-intensive consumption good.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 23 (1999)
Issue (Month): 5-6 (April)
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Web page: http://www.elsevier.com/locate/jedc
Other versions of this item:
- I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kemp, Murray C. & Van Long, Ngo, 1986. "Education, overlapping generations, and the existence of equilibrium," Economics Letters, Elsevier, vol. 22(1), pages 91-95.
- Bengt Holmstrom, 1979.
"Moral Hazard and Observability,"
Bell Journal of Economics,
The RAND Corporation, vol. 10(1), pages 74-91, Spring.
- Binh Tran-Nam & Công Truong & Pierre Tu, 1995. "Human capital and economic growth in an overlapping generations model," Journal of Economics, Springer, vol. 61(2), pages 147-173, June.
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
- Plehn-Dujowich, Jose M., 2009. "Endogenous growth and adverse selection in entrepreneurship," Journal of Economic Dynamics and Control, Elsevier, vol. 33(7), pages 1419-1436, July.
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