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Education and Growth with Endogenous Debt Constraints

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  • David, DE LA CROIX

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES),Belgium and FNRS (Belgium))

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, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2004020.

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Date of creation: 01 Oct 2004
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Handle: RePEc:ctl:louvir:2004020

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Keywords: Financial depth; borrowing constraints; indeterminacy; incentive compatibility;

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  1. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(1), pages 49-71, February.
  2. Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 651-664.
  3. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2004. "The Effects of Financial Development on Convergence: Theory and Evidence," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c009_021, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. José De Gregorio & Se-Jik Kim, 1998. "Credit Markets with Differences in Abilities: Education, Distribution, and Growth," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 42, Centro de Economía Aplicada, Universidad de Chile.
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  7. Philip Bond & Arvind Krishnamurthy, 2004. "Regulating Exclusion from Financial Markets," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 681-707.
  8. DOCQUIER, Frédéric & MICHEL, Philippe, 1994. "Education Subsidies and Endogenous Growth : Implications of Demographic Shocks," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1994052, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  12. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc.
  13. Glewwe, Paul & Jacoby, Hanan G., 2004. "Economic growth and the demand for education: is there a wealth effect?," Journal of Development Economics, Elsevier, Elsevier, vol. 74(1), pages 33-51, June.
  14. Shone,Ronald, 2002. "Economic Dynamics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521017039.
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  16. 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), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 2002036, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  17. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521806428.
  18. 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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  21. Jose De Gregorio & Se-Jik Kim, 1994. "Credit Markets with Differences in Abilities," IMF Working Papers 94/47, International Monetary Fund.
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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, Elsevier, vol. 78(1-2), pages 137-151, April.
  2. 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.
  3. Elena Del Rey & Bertrand Verheyden, 2011. "Loans, Insurance and Failures in the Credit Market for Students," CESifo Working Paper Series 3410, CESifo Group Munich.
  4. Maria Sarigiannidou & Theodore Palivos, 2012. "A Modern Theory of Kuznets’ Hypothesis," Working Papers, Texas Christian University, Department of Economics 201202, Texas Christian University, Department of Economics.
  5. Kitaura, Koji, 2012. "Education, borrowing constraints and growth," Economics Letters, Elsevier, Elsevier, vol. 116(3), pages 575-578.
  6. Erasmo Papagni, 2008. "The Long-run Effects of Household Liquidity Constraints and Taxation on Fertility, Education, Saving, and Growth," Discussion Papers, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy 11_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  7. Min Wang, 2014. "Optimal education policies under endogenous borrowing constraints," Economic Theory, Springer, Springer, vol. 55(1), pages 135-159, January.
  8. Jaime McGovern & Olivier Morand & Kevin Reffett, 2013. "Computing minimal state space recursive equilibrium in OLG models with stochastic production," Economic Theory, Springer, Springer, vol. 54(3), pages 623-674, November.

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