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Financing human capital development via government debt: a small country case using overlapping generations framework

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  • Stauvermann, Peter Josef
  • Kumar, Ronald

Abstract

Using an over-lapping generations (OLG) model, we show how small open economies can enhance their growth through educational subsidies financed via government debt. In our model, we endogenize human capital and fertility without the strong assumptions of altruism or positive spill over effects from human capital accumulation. We show that subsidizing education through government debt leads to a Pareto improvement of all generations. Even if a country is a net borrower in the international capital market, we show that this subsidy-policy can help, under certain conditions, to improve its net borrowing position. Especially, our analysis can be applied to less developed countries, which are locked in a low development trap. A further desirable outcome of our analysis is that fertility rates decline for the small and less developed countries.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47453.

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Date of creation: Apr 2013
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Handle: RePEc:pra:mprapa:47453

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Keywords: fertility; human capital; education subsidy; government debt.;

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