Empirical evidence suggests that parents with higher levels of education generally attach a higher importance to the education of their children. This implies an intergenerational chain transmitting the attitude towards the formation of human capital from one generation to the next. We incorporate this intergenerational chain into an OLG-model with endogenous human capital formation. In absence of any state intervention such an economy might be characterized by multiple steady states with low or high human capital levels. There are also steady states where the population is permanently divided into different groups with differing human capital and welfare levels. Depending on the parameters of the model, a temporary or permanent public investment into human capital formation is needed to overcome steady states with low human capital and welfare levels. Furthermore, even the best steady state is suboptimal when the human capital is privately provided. This inefficiency can be removed by a permanent public subsidy for education.
|Place of Publication||London|
|Publisher||Centre for Economic Policy Research|
|Number of pages||14|
|Publication status||Published - May 2006|
|Series||CEPR Discussion Papers|
- Education subsidy
- Human capital formation and indirect reciprocity