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Raising productivity with pension premium

Debasis Bandyopadhyay and Anatoly La Pere ()

Economic Modelling, 2020, vol. 92, issue C, 295-308

Abstract: We argue that parents underinvest in growing their own children's capability in the absence of property rights over their future income, and that causes economic waste. No amount of collaborative choice among contemporary adults for public education could eliminate it because they face a resource constraint set by their predecessors. Such intergenerational dependence requires an intergenerational contract instead. It involves rewarding parents with a pension premium tied to their own children's taxable income paired with a matching subsidy to parental expenditure. We show how it fully internalizes the intergenerational externality, related to parenting, to eliminate economic waste and, thereby, to raise labor productivity and economic welfare. Our quantitative analysis of a baseline economy reveals significant welfare gains in economies with population ageing coupled with a low degree of parental care for children's future welfare and high returns to parental expenditure on children.

Keywords: Overlapping generations; Small open economy; Intergenerational persistence of human capital; Suboptimal investment in children; A-efficiency; Exogenous fertility; Pricing education with pension (search for similar items in EconPapers)
JEL-codes: H21 H23 H55 I31 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2020.01.009

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