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Intergenerational Complementarities in Education, Endogenous Public Policy, and the Relation Between Growth and Volatility

Authors


  • We would like to thank Charalambos Christou, Ludovic Renou, Costas Roumanias, and especially an anonymous referee and an associate editor of this journal for valuable comments and suggestions. Any remaining errors are solely our responsibility.

Theodore Palivos, Department of Economics, 156 Egnatia Street, Thessalonica GR-540 06, Greece (tpalivos@uom.gr). Dimitrios Varvarigos, Department of Economics, Astley Clarke Building, University Road, Leicester LE1 7RH, UK (dv33@le.ac.uk).

Abstract

We construct an overlapping generations model in which parents vote on the tax rate that determines publicly provided education and offspring choose their effort in learning activities. The technology governing the accumulation of human capital allows these decisions to be strategic complements. In the presence of coordination failure, indeterminacy and, possibly, growth volatility emerge. This indeterminacy can be eliminated by an institutional mechanism that commits to a minimum level of public education provision. Given that, in the latter case, the economy moves along a uniquely determined balanced growth path, we argue that such structural differences can account for the negative correlation between volatility and growth.

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