Krishna B. Kumar

Higher Education Subsidies and Heterogeneity, A Dynamic Analysis

In this paper, we develop a simple dynamic general equilibrium framework that can be used to study issues in higher education policy. The model features heterogeneity in income of parents and academic ability of students. Liquidity constraints create persistence in educational attainment even when ability is independently distributed. A unique steady state with a positive fraction of college educated workers, or one with a development trap, or multiple steady states which feature both of these, can result in equilibrium. We add a government that is equipped with a simple tax scheme and calibrate the model to the US economy to get a benchmark for our policy analysis. The government can design a tax and subsidy scheme that guarantees equality of opportunity, but only at the expense of a decrease in the efficiency of utilization of education resources; the welfare gain is minimal. A policy that aims to maximize the fraction of college-educated labor, by sending as many children as possible to college, results in a big drop in the above-mentioned efficiency with little or no welfare gain. If the government has the political will to use any available signal on ability and provide merit-based aid, it can increase this efficiency with little decrease in welfare. Education subsidies may be a potent tool for countries that are caught in a development trap; a sufficient level of subsidy can cause the economy to emerge from the trap.

Growth and welfare analysis of tax progressivity in a heterogeneous-agent model

In this paper, we use a general equilibrium model of endogenous growth in which there is heterogeneity in skill, income, and tax rates to evaluate the effect of progressivity of taxes on growth and welfare. In this framework, changes in the progressivity of tax rates can have positive growth effects even in situations where changes in flat rate taxes have no effect. Experiments on a calibrated model indicate that the quantitative effects of moving to a flat rate system are economically significant. The assumption made about the engine of growth - an external effect arising from production activities of skilled workers or intentional employment of skilled workers for research and other productivity enhancing activities - has an important effect on the impact of a change in progressivity. Welfare is unambiguously higher in a flat rate system when comparisons are made across balanced growth equilibria; however, when the costs of transition to the higher growth equilibrium are taken into account, only the currently skilled slightly prefer the flat system. (Copyright: Elsevier)

Education And Technology Adoption In A Small Open Economy: Theory And Evidence

We develop a simple open-economy growth model in which productivity growth and education influence each other, and use it to empirically address issues of causality between them. Technology adoption fostered by human capital and economic openness determines productivity growth; the framework allows us to evaluate whether the effects of these two variables on growth documented in previous cross-country regression studies carry over to a simultaneous system closely allied to a model. This model implies that an increase in openness will stimulate technical change but, for empirically plausible values of the intertemporal elasticity of substitution, it will cause a decrease in the level of education. The empirical analysis specifies productivity growth and human capital as endogenous variables and finds evidence broadly consistent with the theory—openness and education stimulate productivity growth, and there is a negative effect of this growth on human capital accumulation.

From Families to Formal Contracts: An Approach to Development

This paper develops a theory in which individuals can use one of two types of human/social capital to enforce contracts: Local capital relies on families and other personal networks; market capital relies on impersonal market institutions such as auditors and courts. Local capital is efficient when most trading is local, but only market capital can support trading between strangers that allows extensive division of labor and industrialization. We show that economies with a low cost of accumulating local capital (say, because people live close together) are richer than economies with a high cost of accumulation when long distance trade is difficult, but are slower to transition to impersonal market exchange (industrialize) when long distance trade becomes feasible. The model provides one way to understand why the wealthiest economies in 1600Â AD, China, India, and the Islamic Middle East, industrialized more slowly than the West. We report an array of historical evidence documenting the pre-industrial importance of family and kinship networks in China, India, and the Islamic world compared to Europe, and the modernization problems linked to local capital.

Africa: Is Aid an Answer?

We address the poverty trap rationale for aid to Africa. We calibrate models that embody typical explanations for stagnation: coordination failures, ineffective mix of occupational choices and imperfect capital markets, and insufficient human capital accumulation coupled with high fertility. Calibration is ideally suited for this evaluation given the paucity of high-quality data, the high degree of model nonlinearity, and the need for conducting counterfactual policy experiments. We find that calibrations that yield multiple equilibria -- one being prosperity and the other stagnation -- are not particularly robust in capturing the African situation. This tempers optimism about foreign aid typically prescribed based on models of multiplicity. Moreover, conditional on multiplicity, the calibrated models indicate that the cost of policy interventions needed to trigger development in stagnant economies is small. The lack of reforms in Africa, despite the low estimated costs, suggests political hurdles to reform. It is not clear that foreign aid would be able to circumvent these. Taken together, we conclude that the case for foreign aid to Africa is weak.

INAPPROPRIATE TECHNOLOGY What Is in It for the Rich

In this paper, we investigate incentives, other than altruism, that developed countries have for improving developing country technologies. We propose a simple model of international trade between two regions, in which individuals have preferences over an inferior good and a luxury good. The poor region has a comparative advantage in the production of the inferior good. Even when costly adaptation of the technology to the poor regions characteristics is required—making the technology inappropriate for local use—there are parameter configurations for which the rich region has an incentive to incur this cost. It benefits from a terms-of-trade improvement and from greater specialization in the luxury good. Indeed, there are cases where the rich region would prefer to improve the poor regions technology for producing the inferior good rather than its own. We apply our model to the Green Revolution and provide a quantitative assessment of its welfare effects.

Skill-specific rather than General Education: A Reason for Slow European Growth?

In this paper, we develop a model of technology adoption and economic growth in which households optimally obtain either a concept-based, general education or a skill-specific, vocational education. General education is more costly to obtain, but reduces the loss of a workers task-specific productivity whenever a new technology is incorporated into production. Firms weigh the cost of adopting and operating new technologies against increased revenues and optimally choose the level of adoption. Conditional on their education, households then choose between working in the technology-adopting sector and the non-adopting sector. We show that an economy whose policies favor vocational education will grow slower in equilibrium than one that favors general education. Moreover, the gap between their growth rates will increase with the growth rate of available technology. Our theory suggests that while European education policies that favored specialized, vocational education might have worked well during the 60s and 70s when available technologies changed slowly, it may have contributed to slow growth and may have increased the growth gap relative to the US in the information age of the 80s and 90s when new technologies emerged at a more rapid pace.

Policies to Free a Trapped Economy: The Case of Sub-Saharan Africa

In this paper, we argue that the condition of education and the economy of the low performing sub-Saharan African countries can be characterized as a stagnant steady state -- a trap. We present a simple heterogeneous-agent model in which high costs of education relative to income and the skill premium can cause the economy to be trapped in such a steady state with minimal educational attainment. We calibrate the model to available data from the sub-Saharan African countries to study policies that could potentially free these trapped economies and set them on a path to a higher steady state. We find that a tax and subsidy scheme that redistributes resources at the trap from poor households with lower ability children to those with higher ability children can pry the economy out of the trap, thus freeing it from dependence on foreign aid in order to achieve the same goal. In addition to the direct cost, a portion of the indirect cost also needs to be subsidized. Moreover, such a policy outperforms the abolition of child labor and the institution and enforcement of compulsory education laws when expenditure neutral welfare comparisons are made.