Endogenous growth and welfare effects of education subsidies and intergenerational transfers

• Published in: Economic modelling 2016-01, Vol.52, p.531-539
• Main Authors: Del Rey, Elena, Lopez-Garcia, Miguel-Angel
• Format: Article
• Language: English
• Subjects: Education; Education policy; Endogenous growth; Growth rate; Human capital; Interest rates; Intergenerational transfers; Studies; Subsidies; Welfare economics
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2015.09.033

We consider an overlapping generations model with endogenous growth and embrace the Two-Part Golden Rule criterion to analyze the welfare effects of intergenerational transfers and education subsidies. The results are compared with those obtained within the well-known exogenous growth framework. In both cases, pay-as-you-go social security enhances welfare if the growth rate is larger than the interest rate at the laissez-faire. However, with endogenous growth, pay-as-you-go social security may also increase welfare even if the growth rate of the economy is less than the interest rate. Education subsidies have an ambiguous impact because they simultaneously transfer resources across generations and change the relative price of investing in human capital. Overall, the paper shows the existence of important non-monotonicities associated with the welfare effects of modifying the tax parameters in an endogenous growth framework. •We study the welfare effects of education subsidies and pensions in an OLG model with physical and human capital.•Pay-as-you-go social security may increase welfare even if the growth rate of the economy is less than the interest rate.•Education subsidies have ambiguous effects in general because they involve income as well as price effects.•We identify non-monotonicities in the welfare effects of modifying the tax parameters that are absent in exogenous growth models.