Economic Theory

, Volume 55, Issue 1, pp 135–159 | Cite as

Optimal education policies under endogenous borrowing constraints

  • Min Wang
Research Article


This paper studies optimal education policies under endogenous borrowing constraints in a standard life-cycle model. In a closed economy, a policy that appropriately bundles an education subsidy with an old-age pension can restore the complete market allocation. Such a policy also removes persistent indeterminacies and endogenous fluctuations that exist in its absence. In a small open economy, a similar policy may restore the complete market allocation for a wide range of parameters, a range much wider than previously believed. These results broaden the rationale for a two-armed welfare state (education and pension) to a large class of economies.


Borrowing constraints Incentive compatibility Education  Intergenerational transfer 

JEL Classification

E62 H52 H55 I28 O16 


  1. Aaron, H.: The social insurance paradox. Can. J. Econ. Polit. Sci. 32(3), 371–374 (1966)CrossRefGoogle Scholar
  2. Andersen, T.M., Bhattacharya, J.: On myopia as rationale for social security. Econ. Theory 47(1), 135–158 (2011)CrossRefGoogle Scholar
  3. Andolfatto, D., Gervais, M.: Human capital investment and debt constraints. Rev. Econ. Dyn. 9(1), 52–67 (2006)CrossRefGoogle Scholar
  4. Azariadis, C., Lambertini, L.: Endogenous debt constraints in life-cycle economies. Rev. Econ. Stud. 70(3), 461–487 (2003)CrossRefGoogle Scholar
  5. Boldrin, M., Montes, A.: The intergenerational state education and pensions. Rev. Econ. Stud. 72(3), 651–664 (2005)CrossRefGoogle Scholar
  6. Cameron, S., Heckman, J.: The dynamics of educational attainment for black, hispanic, and white males. J. Polit. Econ. 109(3), 455–499 (2001)CrossRefGoogle Scholar
  7. Cameron, S., Taber, C.: Estimation of educational borrowing constraints using returns to schooling. J. Polit. Econ. 112(1), 132–182 (2004)CrossRefGoogle Scholar
  8. Cartiglia, F.: Credit constraints and human capital accumulation in the open economy. J. Int. Econ. 43(1--2), 221–236 (1997)CrossRefGoogle Scholar
  9. De Gregorio, J.: Borrowing constraints, human capital accumulation and growth. J. Monet. Econ. 37(1), 49–71 (1996)CrossRefGoogle Scholar
  10. De la Croix, D., Michel, P.: Education and growth with endogenous debt constraints. Econ. Theory 33(3), 509–530 (2007)CrossRefGoogle Scholar
  11. Flug, K., Spilimbergo, A., Wachtenheim, E.: Investment in education: do economic volatility and credit constraints matter? J. Dev. Econ. 55(2), 465–481 (1998)CrossRefGoogle Scholar
  12. Jacoby, H.: Borrowing constraints and progress through school: evidence for Peru. Rev. Econ. Stat. 76(1), 151–160 (1994)CrossRefGoogle Scholar
  13. Kaas, L., Zink, S.: Human capital and growth cycles. Econ. Theory 31(1), 19–33 (2007)CrossRefGoogle Scholar
  14. Kehoe, T., Levine, D.: Debt-constrained asset markets. Rev. Econ. Stud. 60(4), 865–888 (1993)CrossRefGoogle Scholar
  15. Lochner, L., Monge, A.: The nature of credit constraints and human capital. Am. Econ. Rev. 101(6), 2487–2529 (2011)CrossRefGoogle Scholar
  16. Samuelson, P.A.: An exact consumption-loan model of interest with or without the social contrivance of money. J. Polit. Econ. 66(6), 467–482 (1958)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.National School of DevelopmentPeking UniversityBeijingPeople’s Republic of China

Personalised recommendations