On government-created credit markets for education and endogenous growth

• Published in: Economic modelling 2020-11, Vol.92, p.170-179
• Main Authors: Del Rey, Elena, Lopez-Garcia, Miguel-Angel
• Format: Article
• Language: English
• Subjects: Credit markets for education; Endogenous growth; Human capital; Intergenerational transfers; Public policy
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2019.12.016

Interest in public loans to fund (higher) education has been increasing in the last decades. This paper explores the general welfare properties of government-created credit markets for education in a three-period overlapping generations model with physical and human capital. It shows that the mere existence of public credit markets is second-best in nature, and cannot decentralize the optimum. Achieving the first-best “Golden Rule” balanced growth path requires a government loan system that lends the amounts required for optimal investments in education and an optimally chosen pure pay-as-you-go social security system. Student loans and pensions thus appear as two inseparable elements of the policy that maximizes social welfare. •We consider a three overlapping generations model with physical and human capital.•We explore welfare properties of government-created credit markets for education.•The mere existence of public credit markets cannot decentralize the optimum.•The Golden Rule requires enabling individuals to finance optimal education investments.•The Golden Rule also requires an optimally chosen pure PAYGO social security system.