Degree Year

2009

Document Type

Thesis

Degree Name

Bachelor of Arts

Department

Economics

Advisor(s)

Barbara Craig

Keywords

Education, Education subsidy, Subsidy, Developing economics, Developing countries, Human capital, Fertility, Spillovers, Externality, Theoretical model

Abstract

The paper hypothesizes that the level of aggregate human capital in an economy affects the overall returns of an individual's human capital accumulation and fertility decision. However, the positive externalities from aggregate human capital are not internalized by households in their investment decisions. Using an overlapping-generations model, specify the household’s optimization problem in a rural developing country where parents have an old-age support motive that underlies the benefits of having and educating children. The optimal decision of parents is then contrasted with that of the social planner. They differ in that the social planner internalizes the externalities of aggregate human capital on the single consumption good production. The difference between investment decisions yields the country’s optimal education subsidy. The model is tested empirically on secondary education across 59 countries using difference-in-differences and OLS regressions.

Included in

Economics Commons

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