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Education and growth with endogenous debt constraints

  • DE LA CROIX, David
  • MICHEL, Philippe

When future human capital cannot be alienated, households are allowed to borrow up to the point where it is in their own interest not to default. In such a framework, endogenous borrowing limits arise as the outcome of individual rationality constraint. In a model where education is the engine of growth, we show that endogenous borrowing constraints imply global indeterminacy. Comparing outcomes across the various equilibria we show that the relation between growth and yields is hump-shaped. Maximum growth can arise in an equilibrium with binding borrowing constraints, specially if the elasticity if human capital to education spending is large. Deepening financial markets promotes long-run growth in the case of a poverty trap, but not necessarily otherwise.

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File URL: http://dx.doi.org/10.1007/s00199-006-0159-6
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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -1991.

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Handle: RePEc:cor:louvrp:-1991
Note: In : Economic Theory, 33, 509-530, 2007
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  1. DOCQUIER, Frédéric & MICHEL, Philippe, 1994. "Education Subsidies and Endogenous Growth : Implications of Demographic Shocks," CORE Discussion Papers 1994052, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Howitt, Peter & Mayer-Foulkes, David & Aghion, Philippe, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," Scholarly Articles 4481509, Harvard University Department of Economics.
  3. Philip Bond & Arvind Krishnamurthy, 2004. "Regulating Exclusion from Financial Markets," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 681-707, 07.
  4. De Gregorio, Jose & Kim, Se-Jik, 2000. "Credit Markets with Differences in Abilities: Education, Distribution, and Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 579-607, August.
  5. Philip Bond & Arvind Krishnamurthy, 2004. "Regulating Exclusion from Financial Markets," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 681-707.
  6. Stephen V. Cameron & Christopher Taber, 2004. "Estimation of Educational Borrowing Constraints Using Returns to Schooling," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 132-182, February.
  7. Jacoby, Hanan G, 1994. "Borrowing Constraints and Progress through School: Evidence from Peru," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 151-60, February.
  8. Boldrin, Michele & Montes, Ana, 2002. "The Intergenerational State: Education and Pensions," CEPR Discussion Papers 3275, C.E.P.R. Discussion Papers.
  9. AZARIADIS, Costas & de la CROIX, David, 2002. "Growth or equality ? Losers and gainers from financial reform," CORE Discussion Papers 2002058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Glewwe, Paul & Jacoby, Hanan G., 2004. "Economic growth and the demand for education: is there a wealth effect?," Journal of Development Economics, Elsevier, vol. 74(1), pages 33-51, June.
  11. Psacharopoulos, George, 1994. "Returns to investment in education: A global update," World Development, Elsevier, vol. 22(9), pages 1325-1343, September.
  12. repec:cup:cbooks:9780521806428 is not listed on IDEAS
  13. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc.
  14. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  15. repec:cup:cbooks:9780521017039 is not listed on IDEAS
  16. Costas Azariadis & Luisa Lambertini, 2003. "Endogenous Debt Constraints in Lifecycle Economies," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 461-487, 07.
  17. Willem H. Buiter & Kenneth M. Kletzer, 1995. "Capital Mobility, Fiscal Policy and Growth under Self-Financing of Human Capital Formation," NBER Working Papers 5120, National Bureau of Economic Research, Inc.
  18. repec:cup:cbooks:9780521001151 is not listed on IDEAS
  19. W.H. Buiter & K Kletzer, 1995. "Capital Mobility," CEP Discussion Papers dp0245, Centre for Economic Performance, LSE.
  20. De Gregorio, Jose, 1996. "Borrowing constraints, human capital accumulation, and growth," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 49-71, February.
  21. David de la CROIX, 2014. "Economic Growth," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2014019, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  22. David Andolfatto & Martin Gervais, 2004. "Human Capital Investment and Debt Constraints," Labor and Demography 0412006, EconWPA.
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