Education policy and R&D-based growth in an overlapping-generations model

ABSTRACT

We employ a research and development (R&D) based growth overlapping-generations model with endogenous education decision-making and the government’s education policy to examine how education policy and human capital accumulation influence R&D activities. According to our study, an increase in the government’s public education expenditure has an inverted U-shaped effect on the steady-state growth rate. Moreover, a tax rate level that maximizes the steady-state growth rate exists. At this tax rate level, the steady-state welfare level is also maximized.

KEYWORDS:

• Education expenditure
• human capital accumulation
• R&D

JEL CLASSIFICATION:

• H52
• I25
• J24
• O30

Acknowldgement

I thank Koichi Futagami for his pertinent comments and encouragement. I express my sincere gratitude to the editor, Prof. Mark Taylor, and the anonymous referee for his/her constructive comments and suggestions. The Online Appendix is available at https://drive.google.com/file/d/1-rhTiG46zZZ2LvOVB2XYj5diVUg7-jOQ/view?usp=sharing.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ We use the data of 180 countries for the period from 1975 to 2005 and estimate simple regressions wherein the average per capita output growth rate (Growth), taken as the dependent variable, is a function of the government’t expenditure on education (Education1) and the value of its square (Education2). The following equation provides simple estimation results using ordinary least squares:

$Growth=0.162(0.249)+0.714(2.783)Education1-0.065(-2.846)Education2,$

where the figures in parentheses are the values of the $t$-statistics and $R^2=0.210$. The equation presented above suggests that there is an inverted U-shaped correlation between government’s expenditure on education and per capita GDP growth rate.

² Actually, the steady-state values of $h_t$ include $\tau$. However, this lemma only focuses on the direct effect of $\tau$ on $g_t^{\ast }$. The results of considering the effect of $\tau$ on the steady-state values of $h_t$ will be described later.

³ In Hirono (2020), the consideration of private education plays an important role in deriving inverted U-shaped effect. However, from (12), private education does not depend on $\tau$ in our model. By considering the negative effect shown in Lemma 1, we derive the inverted U-shaped effect using a mechanism different from Hirono (2020).