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 InfoPaper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 80.
Length: 33 pages
Date of creation: May 1997
Date of revision: Jan 1998
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Education; Economic growth; Human resources;
Other versions of this item:
- Van Long, Ngo & Shimomura, Koji, 1999. "Education, moral hazard, and endogenous growth," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 23(5-6), pages 675-698, April.
- I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
- Binh Tran-Nam & CÃ´ng Truong & Pierre Tu, 1995. "Human capital and economic growth in an overlapping generations model," Journal of Economics, Springer, Springer, vol. 61(2), pages 147-173, June.
- Kemp, Murray C. & Van Long, Ngo, 1986. "Education, overlapping generations, and the existence of equilibrium," Economics Letters, Elsevier, vol. 22(1), pages 91-95.
- Ghatak, Maitreesh & Morelli, Massimo & Sjostrom, Tomas, 2001. "Occupational Choice and Dynamic Incentives," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(4), pages 781-810, October.
- Rosemary Walker & Liviu Florea, 2014. "Easy-Come-Easy-Go: Moral Hazard in the Context of Return to Education," Journal of Business Ethics, Springer, Springer, vol. 120(2), pages 201-217, March.
- Plehn-Dujowich, Jose M., 2009. "Endogenous growth and adverse selection in entrepreneurship," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(7), pages 1419-1436, July.
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