Michael Kaganovich

Education, Social Security and Growth

The desirability of Government intervention in the functioning of a competitive economy arises in cases where the attained competitive equilibria are inefficient or fail to achieve certain important social goals. In the twentieth century, we witnessed a worldwide phenomena of intervention by governments in the provision of education and social security. In most countries it is not only that a certain level of education is mandatory and is provided by the government but also the higher education is heavily subsidized.

Aging population and education finance

Conventional wisdom suggests that aging of population will increase political pressure to tilt the composition of social spending in favour of the elderly, while potentially sacrificing other publicly provided goods such as education. This view seems to be supported by recent empirical findings that per child public education spending tends to be lower in US jurisdictions with higher fraction of elderly residents. Do these cross-sectional findings also carry the dynamic implication that longevity will lead over time to waning political support for funding of public education? This Paper challenges such implication. We present a model that is consistent with the aforementioned cross-sectional regressions yet predicts an overall positive impact of increasing longevity on public education funding and economic growth.

The Quantity and Quality of Teachers: Dynamics of the Trade-off

The paper addresses the two-fold rise in teacher-student ratio in the American K-12 school system in the post-World War II period accompanied by the evidence of a decline in the relative quality of teachers. We develop a dynamic general equilibrium framework for analyzing the teacher quantity-quality trade-off and offer an explanation to the observed trends. Our OLG model features two stages of education: basic and advanced (college), the latter required of teachers. The cost of hiring teachers is influenced by the outside opportunities for college graduates in the production sector. We show that the latter factor strengthens in the process of endogenous growth and that it affects the optimal trade-off between quantity and quality of teachers such that the number of teachers hired will grow over time while their relative, but not the absolute, human capital attainment will fall. This is accompanied by increasing inequality, among the group of college educated workers in particular. We show that this effect, which we call the rising talent premium, applies whether teacher salaries are determined based on merit pay or, alternatively, by collective bargaining. Moreover, the salary compression characterizing the collective bargaining regime has an additional effect exacerbating the loss of the more talented workers by the teaching profession. Further, we analyze a comparative dynamics effect of exogenous skill-biased technological change which raises the college premium. We show that the effect is detrimental to the aggregate quality of teachers and to the quality of basic education. An important insight from this analysis is that in the process of human capital driven economic growth the rise in premium for high ability outpaces that for the average, whereby this effect is accelerated by technological change. This puts a downward pressure on the “real” quality of education inputs and therefore can create a negative feedback effect on human capital development as a factor of economic growth.

Rolling planning: Optimality and decentralization

Abstract Rolling planning is a procedure of continual revision of dynamic programs, such that the horizon N lying ahead at the time of each revision remains constant. Since, in a rolling plan, the decisions about current resource allocation are implemented without being verified by future agents, this procedure is viewed as a realization of an evolutionary mechanism of intertemporal decentralization. The possibility of designing an evolutionary mechanism leading to optimal intertemporal allocations is generally an open question. The paper establishes such a possibility for a multi-sector Ramsey model: it proves that rolling plans with the horizon N = 2 maximize the average utility over the infinite time interval.

Decentralized Evolutionary Mechanism of Growth in a Linear Multi-sector Model

The paper considers the following mechanism of intertemporal decisions in a linear multisector production model: at each time t a program for two time periods t, t + 1 is worked out but is followed only during the first period t, after which the rest of the program is replaced by a new two-period program for t + 1, t + 2, etc. Terminal conditions in these two-period programs are continually adapted to the current state. The result of the procedure, called an adaptive rolling plan, is shown to yield growth of production at the maximum rate over time which is a natural intertemporal optimality criterion for the production model. It is also demonstrated that adaptive rolling plans can be realized in a decentralized economy, and therefore they provide an intertemporally decentralized mechanism of achieving maximum growth.

Accumulation and compensation turnpikes in a Leontief model (

SummaryThe paper considers a model of an economy with after-effects: any production activity generates some subsequent expenses, like compensation of residual damages. Internalizing the after-effects in production costs at the time they are generated proves to substantially change the shape of long-term programs. It results from an interaction of two components corresponding to the conflicting goals: the fastest growth of production, and the most rapid decrease of residual damages. Each component has its own turnpike, so that the model has two dynamic equilibria. Respectively, shadow prices are a combination of two components: “accumulation prices” declining over time, and “compensation prices” that are growing. In some cases this may result in negative market interest rates.

Distributional constraints on the speed of privatization

Abstract This paper argues that adverse distributional effects may prevent speedy privatization in former command economies. An imbalanced structure of the work force, combined with a politically motivated subsistence consumption constraint, may necessitate gradual privatization. This possibility is illustrated by a numerical example, and a model of gradual privatization is suggested.

Forward and Backward Lags in a Multi-Sector Model

Abstract A generalized von Neumann-Leontief model is considered where both the effects of accumulation (forward lags) and compensation of residual damages (backward lags) are distributed over time. The presence of backward lags implies that any activity generates a tail of subsequent expenses, and, therefore, production cannot be instantaneously stopped. The two-fold direction of intertemporal relations leads to existence of two dynamic equilibria that prove to determine the shape of long-term programs.