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On Welfare Criteria and Optimality in an Endogenous Growth Model

Authors


  • Elena Del Rey, Department of Economics, University of Girona, Campus Montilivi, 17071 Girona, Spain (elena.delrey@udg.edu). Miguel-Angel Lopez-Garcia, Applied Economics Department, Autonomous University of Barcelona, 01893 Ballaterra (Barcelona), Spain (miguelangel.lopez@uab.es). We gratefully acknowledge the hospitality of CORE, UCL, and the University of Exeter Business School, as well as financial support from the Institute of Fiscal Studies, Spain, the Spanish Ministry of Science and Innovation through Research Grants ECO2010-16353 and ECO2012-37572, the Autonomous Government of Catalonia through Research Grants 2009SGR-189 and 2009SGR-600, and XREPP (Research Reference Network for Economics and Public Policies). We are indebted to Raouf Boucekkine, Jordi Caballe, David de la Croix, Christos Koulovatianos, Pierre Pestieau, and one anonymous referee for their insightful comments and criticism. We retain responsibility for any remaining errors.

Abstract

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.

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