Education, Moral Hazard, and Endogenous Growth

Ngo Long and Koji Shimomura

No 80, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: We build an overlapping generations model of endogenous growth driven by human capital formation. Young people differ in their innate abilities, but these differences are not known even by the individuals themselves when they are going through the process of education, so that there are no adverse selection problems. The probability of successful completion of schooling depends on both innate abilities and effort level. Moral hazard arises because effort is not observable. Successful students become skilled workers while unsuccessful ones become unskilled workers. A utilitarian government that cares about income distribution within each generation transfers income from the rich (skilled workers) to the poor (unskilled ones). This is anticipated by the young pupils and reduces incentive for hard work. This results in a lower rate of graduation, and has an adverse effect on the growth rate of human capital and output. Comparative statics results across balanced growth paths are derived. The parameters of interest are the students' rate of time preference, their degree of effort aversion and the relative price of the skill-intensive consumption good.

Keywords: Education; Economic growth; Human resources (search for similar items in EconPapers)
JEL-codes: I21 O40 (search for similar items in EconPapers)
Pages: 33 pages
Date: 1997-05, Revised 1998-01
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Journal Article: Education, moral hazard, and endogenous growth (1999)
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