Education spread and economic development: Portugal 1981–2021

We try to rationalize the fact that the impact of higher education spread on aggregate productivity tends to disappear as a higher share people completes college. For that purpose, we model this situation by means of a coordination (Stag Hunt) game, where a youngster reaps the benefit of higher education only if there is a critical mass of students. During the initial stage, the net reward of higher education is high, so that the Nash equilibrium with general enrolment is selected. As higher education becomes widespread, its relative benefit tends to decline because the relative wage of skilled labour falls with the rise in its supply and universities face diseconomies of scale as they expand over lower density territories. The decrease in the reward is multiplied by the fact that the strategy of avoiding higher education becomes “risk-dominant”, which more likely leads to a coordination breakdown, where the tertiary schooling rate might rise despite the output per worker decreases.