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Free College and Economic Growth: A Paradox of Innovation Productivity

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  • Akiomi Kitagawa

Abstract

This paper investigates the macroeconomic effects of tuition sub-sidies in an overlapping-generations model with endogenous growth and innovation. Calibrated to the Japanese economy, the model ex-plores the “growth puzzle” where expanded educational attainment often yields modest aggregate productivity gains. We identify a “para-dox of innovation productivity”: while subsidies can achieve a Pareto improvement in low-innovation environments, highly productive inno-vation may cause technological progress to outpace capital accumula-tion. This dynamic destabilizes the tax base by eroding the capital-effective labor ratio, rendering aggressive subsidies fiscally infeasible in equilibrium. Our findings suggest that the feasibility of free college policies depends critically on the economy’s innovation productivity and its resulting impact on the dynamic interaction between techno-logical progress and the fiscal foundation.

Suggested Citation

  • Akiomi Kitagawa, 2026. "Free College and Economic Growth: A Paradox of Innovation Productivity," TUPD Discussion Papers 82, Graduate School of Economics and Management, Tohoku University.
    • Handle: RePEc:toh:tupdaa:82
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    File URL: https://hdl.handle.net/10097/0002007787
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    References listed on IDEAS

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    1. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1991. "The Allocation of Talent: Implications for Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 503-530.
    2. 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.
    3. Mr. Philip R. Gerson, 1994. "Tuition Subsidies in a Model of Economic Growth," IMF Working Papers 1994/100, International Monetary Fund.
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