Accounting for the International Quantity-Quality Trade-Off

We investigate what accounts for the observed international differences in schooling and fertility, in particular the role of TFP, age-dependent mortality rates and public education policies. We use a generalized version of the Barro-Becker model that: (i) includes accumulation of human capital; (ii) allows for separate roles for intertemporal substitution, intergenerational substitution, and mortality risk aversion; and (iii) considers intergenerational financial frictions. We calibrate the model to a cross-section of countries in 2013. We find that while differences in TFP account for a large fraction of the dispersion in schooling, fertility and income per capita, public education subsidies play a major role. Public education spending per pupil matters relatively more in explaining the dispersion of fertility, while both the amount spent per pupil and the duration (years) of the subsidy are important in accounting for the dispersion of schooling. Eliminating public education subsidies results in an increase in average fertility, a decrease in human capital and income per capita, and an increase in the dispersion of schooling, fertility and income.