B. Ravikumar

Public versus Private Investment in Human Capital: Endogenous Growth and Income Inequality

In this paper, we present an overlapping generations model with heterogeneous agents in which human capital investment through formal schooling is the engine of growth. We use simple functional forms for preferences, technologies, and income distribution to highlight the distinction between economies with public education and those with private education. We find that income inequality declines more quickly under public education. On the other hand, private education yields greater per capita incomes unless the initial income inequality is sufficiently high. We also find that societies will choose public education if a majority of agents have incomes below average.

Productive government expenditures and long-run growth

The purpose of this paper is to review some of the recent developments in endogenous growth models. Specifically, our focus is on the growth effects of productive government spending in dynamic general equilibrium models. We use a simple overlapping generations model as our basic framework and illustrate the role of taxes and spending. We then examine several related issues: nonrivalry in publicly provided goods, existence and uniqueness of competitive equilibrium, endogenous public policy, ways of financing public expenditures, composition of publicly provided goods and services, and private alternatives. Finally, we review some empirical results related to output elasticity of public capital and educational expenditures.

Public education and income inequality

Abstract This paper examines the evolution of inequality in an overlapping generations model where each individuals human capital investment depends on quality of schools. We consider an education regime where the quality of schools is a publicly provided input financed by an income tax. We show that the income gap between the rich and the poor may widen even when the quality of public education is the same across all individuals. Thus, in the short run, public education may not be the great equalizer as intended by its proponents, though it is in the long run. We also show that the effect of taxes on inequality is ambiguous.

Chaotic dynamics in a cash-in-advance economy

Abstract This paper introduces sufficient conditions for the existence of deterministic cycles and chaos in cash-in-advance models, building on the earlier work of Woodford (1994) . Chaotic equilibria are shown to be particularly likely in the cash-in-advance model, because of a unique characteristic of such models: a discontinuous derivative in the difference equation map at the satiation level of real balances. The existence of a kink means that chaotic equilibria may exist without implausibly large curvatures in the utility function. Since a chaotic time series that makes use of the kink would sometimes exhibit zero nominal interest rates, the paper also gives an example of chaos in which nominal interest rates remain strictly positive.

On the Political Economy of Means-Tested Education Vouchers

We use computational experiments to study the impact of means-tested education vouchers on the level and distribution of educational expenditures.

Growth-Inequality Trade-Offs in a Model with Public Sector R&D

In this paper, the authors present an infinite-horizon economy where the stock of technological knowledge enhances the productivity of all households. Technological knowledge depends upon public sector investments in R&D. These investments are financed by income taxes. Households in the authors economy are differentiated by their initial capital endowments. The authors find that public policy affects the growth rate of per capita income but has no impact on income inequality. They endogenize the public-sector investments in R&D through majority voting. Under the endogenous policy, there is no trade-off between long-run growth and income inequality.

Competitive equilibrium and public investment plans

Abstract We examine a one-sector growth model in which public capital is an external input to private production functions. Revenues from taxing capital and labor income are used to fund public investments. The competitive equilibrium can be obtained by solving an artificial planning problem. We prove that there exists a unique competitive equilibrium which can be characterized by Euler equations and a transversality condition. We then establish the existence of an optimal public investment plan.

Increasing returns, human capital, and the Kuznets curve

Abstract We present a simple model of human capital accumulation which generates the Kuznets curve as an equilibrium outcome. The central ingredient that helps generate the Kuznets curve in the model is what we call short-run increasing returns to scale in the learning technology. The learning technology exhibits increasing returns to scale, but only in the short run, since one of the factors of production, time, is bounded above by the endowment. We show that short-run increasing returns to scale is necessary to obtain the Kuznets curve, but not sufficient.

Why Do Education Vouchers Fail

We examine quantitatively why uniform vouchers have repeatedly suffered electoral defeats against the current system where public and private schools coexist. We argue that the topping-up option available under uniform vouchers is not suficiently valuable for the poorer households to prefer the uniform vouchers to the current mix of public and private education. We then develop a model of publicly funded means-tested education vouchers where the voucher received by each household is a linearly decreasing function of income. Public policy, which is determined by majority voting, consists of two dimensions: the overall funding level (or the tax rate) and the slope of the means testing function. We solve the model when the political decisions are sequential-households vote first on the tax rate and then on the extent of means testing. We establish that a majority voting equilibrium exists. We show that the means-tested voucher regime is majority preferred to the status-quo. These results are robust to alternative preference parameters, income distribution parameters and voter turnout.

Majority Voting in a Model of Means Testing

We study a model of endogenous means testing where households differ in their income and where the in-kind transfer received by each household declines with income. Majority voting determines the two dimensions of public policy: the size of the welfare program and the means-testing rate. We establish the existence of a sequential majority voting equilibrium and show that the means-testing rate increases with the size of the program but the fraction and the identity of the households receiving the transfers are independent of the program size. Furthermore, the set of subsidy recipients does not depend on households preferences, but depends only on income heterogeneity.