Journal Article

The Intergenerational State Education and Pensions

Michele Boldrin and Ana Montes

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 72, issue 3, pages 651-664
Published in print July 2005 | ISSN: 0034-6527
Published online July 2005 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2005.00346.x
The Intergenerational State Education and Pensions

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  • Intertemporal Choice and Growth
  • National Government Expenditures and Related Policies
  • Education and Research Institutions

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When credit markets to finance investment in human capital are missing, the competitive equilibrium allocation is inefficient. When generations overlap, this failure can be mitigated by properly designed social arrangements. We show that public financing of education and public pensions can be designed to implement an intergenerational transfer scheme supporting the complete market allocation. Neither the public financing of education nor the pension scheme we consider resemble standard ones. In our mechanism, via the public education system, the young borrow from the middle aged to invest in human capital. They pay back the debt via a social security tax, the proceedings of which finance pension payments. When the complete market allocation is achieved, the rate of return implicit in this borrowing-lending scheme should equal the market rate of return.

Keywords: D91; H52; H55; I22

Journal Article.  6898 words.  Illustrated.

Subjects: Intertemporal Choice and Growth ; National Government Expenditures and Related Policies ; Education and Research Institutions

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