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The Intergenerational State Education and Pensions

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  • Michele Boldrin
  • Ana Montes

Abstract

When credit markets to finance investment in human capital are missing, the competitive equilibrium allocation is inefficient. When generations overlap, this failure can be mitigated by properly designed social arrangements. We show that public financing of education and public pensions can be designed to implement an intergenerational transfer scheme supporting the complete market allocation. Neither the public financing of education nor the pension scheme we consider resemble standard ones. In our mechanism, via the public education system, the young borrow from the middle aged to invest in human capital. They pay back the debt via a social security tax, the proceedings of which finance pension payments. When the complete market allocation is achieved, the rate of return implicit in this borrowing-lending scheme should equal the market rate of return. Copyright 2005, Wiley-Blackwell.

Suggested Citation

  • Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 651-664.
    • Handle: RePEc:oup:restud:v:72:y:2005:i:3:p:651-664
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    File URL: http://hdl.handle.net/10.1111/j.1467-937X.2005.00346.x
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    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • I20 - Health, Education, and Welfare - - Education - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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