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Education and growth with endogenous debt constraints

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  • DE LA CROIX, David
  • MICHEL, Philippe

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 if 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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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -1991.

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Handle: RePEc:cor:louvrp:-1991

Note: In : Economic Theory, 33, 509-530, 2007
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  1. Costas AZARIADIS & David DE LA CROIX, 2002. "Growth or equality ? Losers and gainers from financial reform," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2002036, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  2. José De Gregorio & Se-Jik Kim, 1998. "Credit Markets with Differences in Abilities: Education, Distribution, and Growth," Documentos de Trabajo 42, Centro de Economía Aplicada, Universidad de Chile.
  3. 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.
  4. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 865-88, October.
  5. 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).
  6. 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.
  7. Willem H. Buiter & Kenneth M. Kletzer, 1995. "Capital Mobility, Fiscal Policy, and Growth under Self-Financing of Human Capital Formation," Canadian Journal of Economics, Canadian Economics Association, vol. 28(s1), pages 163-94, November.
  8. David Andolfatto & Martin Gervais, 2004. "Human Capital Investment and Debt Constraints," Labor and Demography 0412006, EconWPA.
  9. 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.
  10. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 49-71, February.
  11. Psacharopoulos, George, 1993. "Returns to investment in education : a global update," Policy Research Working Paper Series 1067, The World Bank.
  12. Jose De Gregorio & Se-Jik Kim, 1994. "Credit Markets with Differences in Abilities," IMF Working Papers 94/47, International Monetary Fund.
  13. Philip Bond & Arvind Krishnamurthy, 2004. "Regulating Exclusion from Financial Markets," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 681-707, 07.
  14. Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 651-664.
  15. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc.
  16. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521806428, April.
  17. W.H. Buiter & K Kletzer, 1995. "Capital Mobility," CEP Discussion Papers dp0245, Centre for Economic Performance, LSE.
  18. Costas Azariadis & Luisa Lambertini, 2003. "Endogenous Debt Constraints in Lifecycle Economies," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 461-487, 07.
  19. Philip Bond & Arvind Krishnamurthy, 2004. "Regulating Exclusion from Financial Markets," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 681-707.
  20. 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.
  21. Shone,Ronald, 2002. "Economic Dynamics," Cambridge Books, Cambridge University Press, number 9780521017039, April.
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Cited by:
  1. Karine Gente & Miguel A. León-Ledesma & Carine Nourry, 2013. "External Constraints and Endogenous Growth: Why Didn’t Some Countries Benefit from Capital Flows?," AMSE Working Papers 1329, Aix-Marseille School of Economics, Marseille, France, revised Mar 2013.
  2. Fanti, Luciano & Gori, Luca, 2010. "Public health spending, old-age productivity and economic growth: chaotic cycles under perfect foresight," MPRA Paper 21335, University Library of Munich, Germany.
  3. Erasmo Papagni, 2008. "The Long-run Effects of Household Liquidity Constraints and Taxation on Fertility, Education, Saving, and Growth," Discussion Papers 11_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  4. Kitaura, Koji, 2012. "Education, borrowing constraints and growth," Economics Letters, Elsevier, vol. 116(3), pages 575-578.
  5. Min Wang, 2014. "Optimal education policies under endogenous borrowing constraints," Economic Theory, Springer, vol. 55(1), pages 135-159, January.
  6. Elena Del Rey & Bertrand Verheyden, 2008. "Loans, Insurance and Failures in the Credit Market for Students," Working Papers 359, Barcelona Graduate School of Economics.
  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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