Education Policies and Economic Growth

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This paper studies the general equilibrium implications of various types of education policy. In particular, we examine individual-specific vouchers (ISV), individual-specific transfers (1ST) and public investment on economy-wide human capital (GH). Individual-specific vouchers augment inherited private education spending, while individual-specific transfers are standard cash transfers, which increase private income. Public investment on economy-wide human capital provides economy-wide externalities to individual human capital accumulation. The context is an overlapping generations growth model with second-best policy. In particular, the government chooses its tax policy and the allocation of tax revenues among the three types of education policy, subject to the competitive decentralized equilibrium. Numerical simulations show that it is socially optimal to provide a large voucher on inherited individual education expenditures and spend heavily on economy-wide human capital accumulation. In addition, it is optimal to finance government spending by a low proportional tax on initial human capital and a high lump-sum tax.