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Economic Theory

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

Optimal education policies under endogenous borrowing constraints

  • Min Wang
Research Article

Abstract

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.

Keywords

Borrowing constraints Incentive compatibility Education  Intergenerational transfer 

JEL Classification

E62 H52 H55 I28 O16 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

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

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