Abstract
We study a two-sector endogenous growth model with quasi-geometric discounting in which human capital is the engine of growth. We show that a planning economy welfare-dominates a competitive economy and time-consistent government policy is welfare-improving if the agents are sufficiently patient. The government policy consists of a tax on physical capital income and a subsidy on human capital accumulation. Our results differ from those of existing one-sector models with quasi-geometric discounting in which a competitive economy always outperforms a planning economy and the government’s time-consistent tax policies reduce equilibrium welfare.
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