Abstract
In this paper we present a model of optimizing behavior in a two-sector, centrally planned, economy that faces a given interest rate and that is capable of generating sustainable growth. By allowing the model economy to benefit from innovations at the technology frontier through a simple process of technological transfers, we are able to show that education quality not only speeds up the process of technology diffusion but it also helps account for 45-53 per cent of differences in labor productivity. As we argue, failure to control for the gap in technology levels between the leader and the follower economies severely biases downwards the semi-elasticity on educational attainment and it severely biases upwards the share of earnings from capital.
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