Free College and Economic Growth: A Paradox of Innovation Productivity

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.