Bequests or education

Julio Dávila

No 2020020, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: Wether parents choose to endow their offspring with bequests, or with human capital - the effectiveness with which they do so surely depending on their own human capital - or with both, markets cannot deliver, under laissez-faire, the egalitarian planner’s mix of bequests and education that maximises the representative agent’s welfare. Specifically, at the steady state and for a close enough to linear human capital production - out of educational investment and parents human capital - the market wage per efficient unit of labor is too high compared to the marginal productivity of labor resulting from the steady state the planner would choose, so that the market 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 advisable. This is so even if parents internalise in their utility the value of their bequests and educational investment for their children. The problem is not, therefore, one of an externality not internalised, but rather the impossibility of replicating in a decentralised way, under laissez-faire, the kind of intergenerational coordination that a planner constrained only by the feasibility of the allocation of resources can achieve. The planner’s allocation can, nonetheless, be decentralised through the market by means of subsidising labor income at the expense of a lump-sum tax on saving returns.

Keywords: human capital; bequests; externalities; overlapping generations (search for similar items in EconPapers)
JEL-codes: A14 C70 D20 (search for similar items in EconPapers)
Date: 2020-02-11
New Economics Papers: this item is included in nep-dge
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Related works:
Journal Article: Bequests or education (2023)
Working Paper: Bequests or Education (2020)
Working Paper: Bequests or Education (2020)
Working Paper: Bequests or Education (2020)
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