On Welfare Criteria and Optimality in an Endogenous Growth Model

In this paper, we explore the consequences for optimality of a social planner adopting two different welfare criteria. The framework of analysis is an overlapping generations model with physical and human capital. We first show that, when the social welfare function is a discounted sum of individual...

Full description

Saved in:
Bibliographic Details
Published in:Journal of public economic theory 2012-12, Vol.14 (6), p.927-943
Main Authors: DEL REY, ELENA, LOPEZ-GARCIA, MIGUEL-ANGEL
Format: Article
Language:English
Subjects:
Economic theory
Growth models
Human capital
Studies
Subsidies
Welfare
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:In this paper, we explore the consequences for optimality of a social planner adopting two different welfare criteria. The framework of analysis is an overlapping generations model with physical and human capital. We first show that, when the social welfare function is a discounted sum of individual utilities defined over consumption per unit of natural labor, the precise cardinalization of the individual utility function becomes crucial for both the characterization of the social optimum and the policies that support it. Also, decentralizing the social optimum requires an education subsidy that is definitely positive, but its size depends in a determinant way on the aforementioned cardinalization. In contrast, when the social welfare function is a discounted sum of individual utilities defined over consumption per unit of efficient labor, the precise cardinalization of preferences becomes irrelevant. More strikingly, along the optimal growth path, the education subsidy is negative, i.e., the planner should tax rather than subsidize investments in human capital.
ISSN:1097-3923
1467-9779
DOI:10.1111/jpet.12004