Public and private expenditures on human capital: Accumulation in India

We study a model of human capital driven growth, where the parents human capital serves as a productive input in the childs human capital production only when that of the former exceeds a minimum level required to intellectually contribute to the child's learning. Private and public expenditures on education enter in the childs human capital production function, and are allowed to vary in terms of substitutability and relative productivity. Households receive income from labor and face both labor and consumption taxes. The government receives consumption tax revenues and a proportion of income tax revenues and spends these revenues on public education. We calibrate the model to a state in India and experimentally increase public education spending through various tax instruments. We lnd that raising the consumption tax generates about as much economic growth as realizing an increase in the center-state transfer from the federal level. We also lnd that lnancing this increase in public spending through the labor tax increases economic growth by less than utilizing the consumption tax; however, it reduces inequality by more than utilizing the consumption tax. Hence, there is growth-inequality trade-ok. We extend our results by characterizing their dependence on the degree of substitutability between public and private education spending.