IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v70y2018icp1-14.html
   My bibliography  Save this article

Public and private education expenditures, variable elasticity of substitution and economic growth

Author

Listed:
  • Gamlath, Sharmila
  • Lahiri, Radhika

Abstract

We develop an overlapping generations model to examine how public and private education expenditures impacts on an economy's long run outcomes. Young agents' education is “produced” according to a variable elasticity of substitution production function where the inputs are public education and private expenditures undertaken by parents. Results reveal that higher substitutability between these inputs enables agents to reduce private education expenditures and spend more on consumption and investment, leading to better economic outcomes. Higher aggregate substitutability therefore also implies that a higher tax rate is optimal, since this reduces the need for private educational expenditures to supplement public education expenditures. Analytical results reveal that, depending on initial conditions, the economy could either achieve smooth convergence towards the long run outcome or experience fluctuations during transition. However, numerical analysis suggests that a smooth transition is more likely. Fluctuations during transition may occur when the share of parental human capital in determining an agent's human capital is high. Hence, institutional reforms that reduce the importance of inherited human capital by providing everyone better access to high quality education could facilitate smooth convergence to the long run outcome.

Suggested Citation

  • Gamlath, Sharmila & Lahiri, Radhika, 2018. "Public and private education expenditures, variable elasticity of substitution and economic growth," Economic Modelling, Elsevier, vol. 70(C), pages 1-14.
  • Handle: RePEc:eee:ecmode:v:70:y:2018:i:c:p:1-14
    DOI: 10.1016/j.econmod.2017.10.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999316306630
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Voyvoda, Ebru & Yeldan, Erinç, 2015. "Public policy and growth in Canada: An applied endogenous growth model with human and knowledge capital accumulation," Economic Modelling, Elsevier, vol. 50(C), pages 298-309.
    2. Das, Mausumi, 2007. "Persistent inequality: An explanation based on limited parental altruism," Journal of Development Economics, Elsevier, vol. 84(1), pages 251-270, September.
    3. Zhang, Yu, 2013. "Does private tutoring improve students’ National College Entrance Exam performance?—A case study from Jinan, China," Economics of Education Review, Elsevier, vol. 32(C), pages 1-28.
    4. Jean-Pierre Vidal & Michael Bräuninger, 2000. "Private versus public financing of education and endogenous growth," Journal of Population Economics, Springer;European Society for Population Economics, vol. 13(3), pages 387-401.
    5. James Tooley, 2004. "The right to education," Economic Affairs, Wiley Blackwell, vol. 24(3), pages 75-75, September.
    6. Boldrin, Michele, 2005. "Public education and capital accumulation," Research in Economics, Elsevier, vol. 59(2), pages 85-109, June.
    7. Kaganovich, Michael & Zilcha, Itzhak, 1999. "Education, social security, and growth," Journal of Public Economics, Elsevier, vol. 71(2), pages 289-309, February.
    8. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
    9. Sharada Weir, 2000. "Intergenerational transfers of human capital: evidence on two types of education externalities," CSAE Working Paper Series 2000-15, Centre for the Study of African Economies, University of Oxford.
    10. Debdulal Mallick, 2012. "The role of capital-labour substitution in economic growth," Indian Growth and Development Review, Emerald Group Publishing, vol. 5(1), pages 89-101, April.
    11. Arcalean, Calin & Schiopu, Ioana, 2010. "Public versus private investment and growth in a hierarchical education system," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 604-622, April.
    12. Dang, Hai-Anh, 2007. "The determinants and impact of private tutoring classes in Vietnam," Economics of Education Review, Elsevier, vol. 26(6), pages 683-698, December.
    13. Stefanie Hof, 2014. "Does Private Tutoring Work? The Effectiveness of Private Tutoring: A Nonparametric Bounds Analysis," Economics of Education Working Paper Series 0096, University of Zurich, Department of Business Administration (IBW).
    14. Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March.
    15. Goldhaber, Dan, 1999. "An Endogenous Model of Public School Expenditures and Private School Enrollment," Journal of Urban Economics, Elsevier, vol. 46(1), pages 106-128, July.
    16. de la Croix, David & Doepke, Matthias, 2004. "Public versus private education when differential fertility matters," Journal of Development Economics, Elsevier, vol. 73(2), pages 607-629, April.
    17. Irmen, Andreas, 2011. "Steady-state growth and the elasticity of substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1215-1228, August.
    18. Epple, Dennis & Romano, Richard E., 1996. "Ends against the middle: Determining public service provision when there are private alternatives," Journal of Public Economics, Elsevier, vol. 62(3), pages 297-325, November.
    19. Oded Galor, 1996. "Discrete Dynamical Systems," Working Papers 96-23, Brown University, Department of Economics.
    20. repec:fth:oxesaf:2000-15 is not listed on IDEAS
    21. Sunwoong Kim & Ju-Ho Lee, 2010. "Private Tutoring and Demand for Education in South Korea," Economic Development and Cultural Change, University of Chicago Press, vol. 58(2), pages 259-296, January.
    22. Zhu, Xi & Whalley, John & Zhao, Xiliang, 2014. "Intergenerational transfer, human capital and long-term growth in China under the one child policy," Economic Modelling, Elsevier, vol. 40(C), pages 275-283.
    23. Epple, Dennis & Romano, Richard E, 1996. "Public Provision of Private Goods," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 57-84, February.
    24. Revankar, Nagesh S, 1971. "A Class of Variable Elasticity of Substitution Production Functions," Econometrica, Econometric Society, vol. 39(1), pages 61-71, January.
    25. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-834, August.
    26. Blankenau, William F. & Simpson, Nicole B., 2004. "Public education expenditures and growth," Journal of Development Economics, Elsevier, vol. 73(2), pages 583-605, April.
    27. William Blankenau & Steven Cassou & Beth Ingram, 2007. "Allocating Government Education Expenditures Across K-12 and College Education," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(1), pages 85-112, April.
    28. Peter Bearse & Gerhard Glomm & Debra Moore Patterson, 2005. "Endogenous Public Expenditures on Education," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(4), pages 561-577, October.
    29. Miguel Gouveia, 1997. "Majority rule and the public provision of a private good," Public Choice, Springer, vol. 93(3), pages 221-244, December.
    30. Dissou, Yazid & Didic, Selma & Yakautsava, Tatsiana, 2016. "Government spending on education, human capital accumulation, and growth," Economic Modelling, Elsevier, vol. 58(C), pages 9-21.
    31. Bertola, Giuseppe, 1996. "Factor shares in OLG models of growth," European Economic Review, Elsevier, vol. 40(8), pages 1541-1560, November.
    32. Randall S. Jones, 2013. "Education Reform in Korea," OECD Economics Department Working Papers 1067, OECD Publishing.
    33. Stefanie Hof, 2014. "Does private tutoring work? The effectiveness of private tutoring: a nonparametric bounds analysis," Education Economics, Taylor & Francis Journals, vol. 22(4), pages 347-366, August.
    34. Glomm, Gerhard, 1997. "Parental choice of human capital investment," Journal of Development Economics, Elsevier, vol. 53(1), pages 99-114, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Variable elasticity of substitution; Education expenditure; Stability analysis; Optimal policy; E23; E24; I22;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:70:y:2018:i:c:p:1-14. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.