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Education and growth with endogenous debt constraints

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  • David Croix

    ()

  • Philippe Michel

Abstract

When future human capital cannot be alienated, households are allowed to borrow up to the point where it is in their own interest not to default. In such a framework, endogenous borrowing limits arise as the outcome of individual rationality constraint. In a model where education is the engine of growth, we show that endogenous borrowing constraints imply global indeterminacy. Comparing outcomes across the various equilibria we show that the relation between growth and yields is hump-shaped. Maximum growth can arise in an equilibrium with binding borrowing constraints, specially if the elasticity of human capital to education spending is large. Deepening financial markets promotes long-run growth in the case of a poverty trap, but not necessarily otherwise.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 33 (2007)
Issue (Month): 3 (December)
Pages: 509-530

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Handle: RePEc:spr:joecth:v:33:y:2007:i:3:p:509-530

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Related research

Keywords: Financial depth; Borrowing constraints; Indeterminacy; Incentive compatibility; O410; 0160; J240; D310;

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References

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  1. Stephen V. Cameron & Christopher Taber, 2004. "Estimation of Educational Borrowing Constraints Using Returns to Schooling," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 132-182, February.
  2. Jose De Gregorio & Se-Jik Kim, 1994. "Credit Markets with Differences in Abilities," IMF Working Papers 94/47, International Monetary Fund.
  3. Psacharopoulos, George, 1993. "Returns to investment in education : a global update," Policy Research Working Paper Series 1067, The World Bank.
  4. Philip Bond & Arvind Krishnamurthy, 2004. "Regulating Exclusion from Financial Markets," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 681-707.
  5. Costas Azariadis & Luisa Lambertini, 2003. "Endogenous Debt Constraints in Lifecycle Economies," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 461-487, 07.
  6. Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers 445, Federal Reserve Bank of Minneapolis.
  7. Glewwe, Paul & Jacoby, Hanan G., 2004. "Economic growth and the demand for education: is there a wealth effect?," Journal of Development Economics, Elsevier, vol. 74(1), pages 33-51, June.
  8. Shone,Ronald, 2002. "Economic Dynamics," Cambridge Books, Cambridge University Press, number 9780521017039.
  9. Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 651-664.
  10. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521806428.
  11. De Gregorio, Jose & Kim, Se-Jik, 2000. "Credit Markets with Differences in Abilities: Education, Distribution, and Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 579-607, August.
  12. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2004. "The Effect of Financial Development on Convergence: Theory and Evidence," NBER Working Papers 10358, National Bureau of Economic Research, Inc.
  13. Buiter, Willem H & Kletzer, Kenneth, 1995. "Capital Mobility, Fiscal Policy and Growth Under Self-Financing of Human Capital Formation," CEPR Discussion Papers 1179, C.E.P.R. Discussion Papers.
  14. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 49-71, February.
  15. David Andolfatto & Martin Gervais, 2006. "Human Capital Investment and Debt Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 52-67, January.
  16. AZARIADIS, Costas & de la CROIX, David, 2002. "Growth or equality ? Losers and gainers from financial reform," CORE Discussion Papers 2002058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  17. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc.
  18. Philip Bond & Arvind Krishnamurthy, 2004. "Regulating Exclusion from Financial Markets," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 681-707, 07.
  19. DOCQUIER, Frédéric & MICHEL, Philippe, 1994. "Education Subsidies and Endogenous Growth : Implications of Demographic Shocks," CORE Discussion Papers 1994052, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  20. W.H. Buiter & K Kletzer, 1995. "Capital Mobility," CEP Discussion Papers dp0245, Centre for Economic Performance, LSE.
  21. Jacoby, Hanan G, 1994. "Borrowing Constraints and Progress through School: Evidence from Peru," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 151-60, February.
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Citations

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Cited by:
  1. Fanti, Luciano & Gori, Luca, 2011. "Public health spending, old-age productivity and economic growth: Chaotic cycles under perfect foresight," Journal of Economic Behavior & Organization, Elsevier, vol. 78(1), pages 137-151.
  2. Karine Gente & Miguel León-Ledesma & Carine Nourry, 2013. "External Constraints and Endogenous Growth: Why Didn't Some Countries Benefit from Capital Flows?," Working Papers halshs-00822385, HAL.
  3. Kitaura, Koji, 2012. "Education, borrowing constraints and growth," Economics Letters, Elsevier, vol. 116(3), pages 575-578.
  4. Elena Del Rey & Bertrand Verheyden, 2008. "Loans, Insurance and Failures in the Credit Market for Students," Working Papers 359, Barcelona Graduate School of Economics.
  5. Papagni, Erasmo, 2008. "The Long-run Effects of Household Liquidity Constraints and Taxation on Fertility, Education, Saving and Growth," MPRA Paper 12793, University Library of Munich, Germany.
  6. Min Wang, 2014. "Optimal education policies under endogenous borrowing constraints," Economic Theory, Springer, vol. 55(1), pages 135-159, January.
  7. Jaime McGovern & Olivier Morand & Kevin Reffett, 2013. "Computing minimal state space recursive equilibrium in OLG models with stochastic production," Economic Theory, Springer, vol. 54(3), pages 623-674, November.

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