Comparison of Educational Subsidy Schemes in an Endogenous Growth Model

Abstract

This study considers a three-period overlapping generations model with an endogenous growth setting, in which an agent borrows in the first period and repays the loan in the second period under a perfect credit market. Two educational subsidy schemes are considered: one is provided when an agent borrows and the other is provided when the agent repays their loan. This study compares the growth rates and social welfare under each educational subsidy scheme at a unique balanced growth path equilibrium. The first contribution of this paper is that it provides sufficient conditions under which the growth rate in one scheme is higher than that in the other. A key to determining the size relationship of growth rates is whether the production of goods and services is physical-capital-intensive, which determines the size of the interest rate. The second contribution is that it shows that higher growth and higher social welfare may not be achieved simultaneously. Specifically, this paper presents a case wherein, even if the growth rate when student loans are subsidized is higher than that when the cost of education is subsidized, social welfare defined by the Golden Rule criterion in the former scheme can be lower than that in the latter scheme.