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Education and growth with endogenous debt constraints

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  • DE LA CROIX, David
  • MICHEL, Philippe

Abstract

When future human capital cannot be alienated, households are allowed to borrow up to the point where it is in their own interest not to default. In such a framework, endogenous borrowing limits arise as the outcome of individual rationality constraint. In a model where education is the engine of growth, we show that endogenous borrowing constraints imply global indeterminacy. Comparing outcomes across the various equilibria we show that the relation between growth and yields is hump-shaped. Maximum growth can arise in an equilibrium with binding borrowing constraints, specially if the elasticity of human capital to education spending is large. Deepening financial markets promotes long-run growth in the case of a poverty trap, but not necessarily otherwise.
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Suggested Citation

  • DE LA CROIX, David & MICHEL, Philippe, 2007. "Education and growth with endogenous debt constraints," LIDAM Reprints CORE 1991, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:1991
    DOI: 10.1007/s00199-006-0159-6
    Note: In : Economic Theory, 33, 509-530, 2007
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    References listed on IDEAS

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    Cited by:

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    2. Elena Del Rey & Bertrand Verheyden, 2008. "Loans, Insurance and Failures in the Credit Market for Students," Working Papers 359, Barcelona School of Economics.
    3. Boucekkine, Raouf & Seegmuller, Thomas & Venditti, Alain, 2021. "Advances in growth and macroeconomic dynamics: In memory of Carine Nourry," Mathematical Social Sciences, Elsevier, vol. 112(C), pages 1-6.
    4. Wang, Min, 2010. "Essays on Environment, Natural Resource, Growth and Development," ISU General Staff Papers 201001010800002824, Iowa State University, Department of Economics.
    5. Destrée, Nicolas & Gente, Karine & Nourry, Carine, 2021. "Migration, remittances and accumulation of human capital with endogenous debt constraints," Mathematical Social Sciences, Elsevier, vol. 112(C), pages 38-60.
    6. Jaime McGovern & Olivier Morand & Kevin Reffett, 2013. "Computing minimal state space recursive equilibrium in OLG models with stochastic production," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(3), pages 623-674, November.
    7. Fanti, Luciano & Gori, Luca, 2011. "Public health spending, old-age productivity and economic growth: Chaotic cycles under perfect foresight," Journal of Economic Behavior & Organization, Elsevier, vol. 78(1-2), pages 137-151, April.
    8. Min Wang, 2014. "Optimal education policies under endogenous borrowing constraints," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(1), pages 135-159, January.
    9. Erasmo Papagni, 2008. "The Long-run Effects of Household Liquidity Constraints and Taxation on Fertility, Education, Saving, and Growth," Discussion Papers 11_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
    10. Michael Hatcher & Panayiotis M. Pourpourides, 2023. "Does the impact of private education on growth differ at different levels of credit market development?," Review of Development Economics, Wiley Blackwell, vol. 27(1), pages 291-322, February.
    11. Bhattacharya, Joydeep & Qiao, Xue & Wang, Min, 2016. "Endogenous Borrowing Constraints And Wealth Inequality," Macroeconomic Dynamics, Cambridge University Press, vol. 20(6), pages 1413-1431, September.
    12. Kitaura, Koji, 2012. "Education, borrowing constraints and growth," Economics Letters, Elsevier, vol. 116(3), pages 575-578.
    13. Florin Bidian & Camelia Bejan, 2015. "Martingale properties of self-enforcing debt," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(1), pages 35-57, September.
    14. Hatcher, Michael, 2022. "Education, borrowing constraints and growth: A note," Economics Letters, Elsevier, vol. 212(C).
    15. Bernhard Eckwert & Itzhak Zilcha, 2017. "Student loans: When is risk sharing desirable?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 13(2), pages 217-231, June.
    16. Maria Sarigiannidou & Theodore Palivos, 2012. "A Modern Theory of Kuznets’ Hypothesis," Working Papers 201202, Texas Christian University, Department of Economics.
    17. Khraiche, Maroula & Boudreau, James, 2020. "Can lower remittance costs improve human capital accumulation in Africa?," Journal of Policy Modeling, Elsevier, vol. 42(5), pages 1000-1021.
    18. Lartigue-Mendoza, Jacques & Domínguez, Salomón, 2021. "The Effect of Wages on Human Capital Investment," EconStor Preprints 246818, ZBW - Leibniz Information Centre for Economics.
    19. Oliver Enrique PARDO REINOSO, 2006. "Acumulación de capital humano y gasto público en educación: Un Modelo OLG para Colombia," Archivos de Economía 1943, Departamento Nacional de Planeación.
    20. Miyazaki, Koichi, 2016. "Student loans, fertility, and economic growth," MPRA Paper 71604, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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