Abstract
This paper shows that, when parents can endow their offspring with bequests and human capital, markets cannot deliver (generically under laissez-faire) the planner’s choice, if educational investments affect total factor productivity—as empirical evidence establishes. Moreover, for a human capital production function close enough to affine (around market and planner steady states with similar fertilities), the market steady state wage is higher than the marginal productivity of labor at the planner’s steady state, so that the market steady state human capital is too low. In other words, the market misses the planner’s allocation by leading households to transfer to their offspring more in bequests and less in education than would be optimal. These results obtain in spite of parents perfectly internalising (1) the value for their children of their bequests and educational investment, but not (2) the externality on total factor productivity—nor hence on factor prices. The planner’s allocation can, nonetheless, be decentralised subsidising labor income through a lump-sum tax on saving returns that reduces bequests. An estimate of the subsidy needed—for standard functional forms and parameter values estimated from US data—suggests a sizeable market inefficiency.
Article PDF
Similar content being viewed by others
References
Amir, R.: Strategic intergenerational bequests with stochastic convex production. Econ. Theory 8, 367–376 (1996)
Arrow, K.J.: The economic implications of learning by doing. Rev. Econ. Stud. 29, 155–173 (1962)
Bénabou, R.: Tax and education policy in a heterogeneous-agent economy: What levels of redistribution maximize growth and efficiency? Econometrica 70(2), 481–517 (2002)
Barnett, R.C., Bhattacharya, J., Bunzel, H.: Deviant generations, Ricardian equivalence, and growth cycles. Econ. Theory 52, 367–396 (2013)
Barro, R.: Are government bonds net wealth? J. Polit. Econ. 82, 1095–1117 (1974)
Barro, R.: Human capital and growth. Am. Econ. Rev. 91(2), 12–17 (2001)
Benhabib, J., Spiegel, M. M.: The role of human capital in economic development: Evidence from aggregate cross-country data. J. Monetary Econ. 34, 143–173 (1994)
Benhabib, J., Spiegel, M.M.: Human capital and technology diffusion. Chapter 13 of Handbook of Economic Growth (2005)
Bernheim, B.D.: Intergenerational altruism, dynastic equilibria and social welfare. Rev. Econ. Stud. 56, 119–128 (1989)
Bernheim, B.D., Ray, D.: Economic growth with intergenerational altruism. Rev. Econ. Stud. 54(2), 227–241 (1987)
Bernheim, B.D., Shleifer, A., Summers, L.H.: The strategic bequest motive. J. Polit. Econ. 93(6), 1045–1076 (1985)
Brittain, J.A.: Inheritance and the Inequality of Material Wealth. Brookings Institution, Washington (1978)
Bronzini, R., Piselli, P.: Determinants of long-run regional productivity with geographical spillovers: the role of R &D, human capital and public infrastructure. Reg. Sci. Urban Econ. 39(2), 187–199 (2009)
Boserup, S.H., Kopczuk, W., Kreiner, C.T.: The role of Bequets in shaping wealth inequality: evidence from Danish wealth records. Am. Econ. Rev. 106(5), 656–661 (2016)
Caballé, J.: Endogenous growth, human capital, and bequests in a life-cycle model. Oxford Econ. Pap. New Ser. 47(1), 156–181 (1995)
Chevalier, A., Harmon, C.O., Sullivan, V., Walker, I.: The impact of parental income and education on the schooling of their children. IZA Working Paper 1496 (2005)
Coe, D.T., Helpman, E., Hoffmaister, A.W.: International R &D spillovers and institutions. Eur. Econ. Rev. 53(7), 723–741 (2009)
Córdoba, J., Ripoll, M.: Intergenerational transfers and the fertility-income relationship. Econ. J. 126(593), 949–977 (2016)
Dávila, J.: Output externalities on total factort productivity. Macroecon. Dyn. 21(6), 1389–1425 (2017)
Davies, J.B.: Uncertain lifetime, consumption, and dissaving in retirement. J. Polit. Econ. 89(3), 561–577 (1981)
Drazen, A.: Government debt, human capital, and bequests in a life-cycle model. J. Polit. Econ. 86(3), 505–516 (1978)
Erosa, A., Koreshkova, T., Restuccia, D.: How important is human capital? A quantitative theory assessment of world income inequality. Rev. Econ. Stud. 77(4), 1421–1449 (2010)
Glomm, G., Ravikumar, B.: Public versus private investment in human capital: endogenous growth and income inequality. J. Polit. Econ. 100(4), 818–834 (1992)
Gobbi, P.E., Goñi, M.: Childless aristocrats: inheritance and the extensive margin of fertility. Econ. J. 131(637), 2089–2118 (2021)
Gorman, W.M.: On a class of preference fields. Metroeconomica 13(2), 53–56 (1961)
Griffith, R., Redding, S., Van Reenen, J.: Mapping the two faces of R &D: productivity growth in a panel of OECD industries. Rev. Econ. Stat. 86(4), 883–895 (2004)
Hurd, M.D.: Mortality risk and bequests. Econometrica 57(4), 779–813 (1989)
Kim, Y.E., Loayza, N.V.: Productivity and its determinants: innovation, education, efficiency, infrastructure, and institutions. Policy Research Working Paper 8852, World Bank (2019)
Lucas, R.E.: On the mechanics of economic development. J. Monetary Econ. 22, 3–42 (1988)
Miller, S.M., Upadhyay, M.P.: The effects of openness, trade orientation, and human capital on total factor productivity. J. Dev. Econ. 63(2), 399–423 (2000)
Mirer, T.W.: The wealth age relation among the aged. Am. Econ. Rev. 69, 435–443 (1979)
Nishiyama, S.: Bequests, inter vivos transfers, and wealth distribution. Rev. Econ. Dyn. 5(4), 892–931 (2002)
Pecchenino, R.A., Pollard, P.S.: Dependent children and aged parents: funding education and social security in an aging economy. J. Macroecon. 24(2), 145–169 (2007)
Romer, P.M.: Increasing returns and long-run growth. J. Polit. Econ. 94, 1002–1035 (1986)
Staffolani, S., Valentini, E.: Bequest taxation and efficient allocation of talents. Econ. Model. 24, 648–672 (2007)
Vanlentinyi, A., Herrendorf, B.: Measuring factor income shares at the sectoral level. Rev. Econ. Dyn. 11(4), 820–835 (2008)
Wei, Z., Hao, R.: The role of human capital in china’s total factor productivity growth: a cross-province analysis. Dev. Econ. 49(1), 1–35 (2011)
Weil: Love thy children. J. Monetary Econ. 19, 377–391 (1987)
Yash, S.K., Zhang, C.A., Lu, Y., Eisenberg, M.L.: The age of fathers in the USA is rising: an analysis of 168.867.480 births from 1972 to 2015. Hum. Reprod. 32, 2110–2116 (2017)
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Funding from the Social Policy Research Grant No. 0000038 and the FDCRGP Grant No. 11022021FD2908 from Nazarbayev University is gratefully acknowledged.
Rights and permissions
Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.
About this article
Cite this article
Dávila, J. Bequests or education. Econ Theory 75, 1039–1069 (2023). https://doi.org/10.1007/s00199-022-01436-2
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00199-022-01436-2