Abstract
This paper uses an overlapping generation model with endogenous fertility to study households' educational choices. Individuals are assumed to be selfish and the intra-family deals are ruled by a self-enforcing ‘family constitution’. Within this framework, parents finance their children's education inasmuch as they receive a return (a share of the increased earnings accruing to the children). We show that under this arrangement, individuals purchase less education than socially optimal. This yields a rationale for public action, either via public provision or via subsidization. We analyse both policies and find that they have different implications for households' fertility decisions. In particular, public provision should be preferred if we wish to keep the rate of population growth as high as possible (e.g. to alleviate the pressure of an ageing population on the pension system).
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