The Long-run Effects of Household Liquidity Constraints and Taxation on Fertility, Education, Saving and Growth

Erasmo Papagni

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates economic growth under liquidity constraints by taking into account the choices of fertility, human capital and saving. In a model of four overlapping generations, parents are altruistic towards their offspring and finance their education investment. The government provides education subsidies to young adult parents and levies taxes on income of the adult generation. Sensitivity analysis on borrowing limits and tax parameters highlights effects with opposite sign on the main endogenous variables at steady state. A lift in liquidity constraints decreases savings and capital accumulation and this effect is responsible for the ambiguous sign of comparative statics on the rate of fertility and on human capital investment. From model simulation, we derive an inverted U-shaped curve relating the borrowing limit with fertility, education and growth, meaning that financial reforms in the less developed countries have positive effects on the economy in the long-run, even if they raise fertility and reduce savings. Greater government subsidies to human capital investments and lower income taxes have positive effects on savings and fertility. The same parameters present ambiguous effects on education investments and growth. Numerical simulations show that a) human capital investment has an inverted U-shaped relation with income taxes and education subsidies ; b) economic growth decreases with greater income taxes and increases with higher education subsidies. Jel codes: O40, O16, J13, D91.

Keywords: Borrowing constraints; taxation; endogenous population; economic growth (search for similar items in EconPapers)
JEL-codes: D91 J13 O16 O40 (search for similar items in EconPapers)
Date: 2008-05
New Economics Papers: this item is included in nep-dev, nep-dge, nep-edu, nep-fdg and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Long-run Effects of Household Liquidity Constraints and Taxation on Fertility, Education, Saving, and Growth (2008)
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