Education and growth with endogenous debt constraints

David de la Croix () and Philippe Michel

No 2004074, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: When future human capital cannot be alienated, households are allowed to borrow up to the point where it is in their own interest not to default. In such a framework, endogenous borrowing limits arise as the outcome of individual rationality constraint. In a model where education is the engine of growth, we show that endogenous borrowing constraints imply global indeterminacy. Comparing outcomes across the various equilibria we show that the relation between growth and yields is hump-shaped. Maximum growth can arise in an equilibrium with binding borrowing constraints, specially if the elasticity of human capital to education spending is large. Deepening financial markets promotes long-run growth in the case of a poverty trap, but not necessarily otherwise.

Keywords: Þnancial depth; borrowing constraints; indeterminacy; incentive compatibility (search for similar items in EconPapers)
JEL-codes: O41 O16 J24 D31 (search for similar items in EconPapers)
Date: 2004-11-01
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Related works:
Working Paper: Education and Growth with Endogenous Debt Constraints (2004)
Journal Article: Education and growth with endogenous debt constraints (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:cor:louvco:2004074

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