Human capital investment and debt constraints


With Andolfatto, David and Gervais, Martin (2006) Human capital investment and debt constraints. Review of Economic Dynamics, 9, (1), 52-67. (doi:10.1016/j.red.2005.08.002).

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Description/Abstract

When young individuals face binding debt constraints, their human capital investments will be insufficiently financed by private creditors. If generations overlap, then a well-designed fiscal policy may be able to improve human capital investments by replacing missing capital markets with an intergenerational transfer scheme. The optimal (balanced budget) fiscal policy in this context entails the joint provision of an education subsidy for the young and a pension program for the old, financed with a tax on those in their peak earning years. We demonstrate, however, that the desirability of such a cradle-to-grave policy depends crucially on the assumption of an exogenous debt constraint. If debt constraints arise endogenously for reasons of limited commitment, then the optimal (balanced budget) fiscal policy looks radically different. Furthermore, we find that cradle-to-grave type policy interventions may actually lead to lower levels of human capital investment as altered default incentives induce private creditors to contract the supply of student loans by an amount greater than the subsidy. In some cases, the constrained-optimal policy entails zero intervention. These results highlight the importance of taking seriously the reasons for why debt constraints exist.

Item Type: Article
ISSNs: 1094-2025 (print)
Related URLs:
Keywords: education, fiscal policy, debt constraints
Subjects: H Social Sciences > HN Social history and conditions. Social problems. Social reform
H Social Sciences > HG Finance
L Education > L Education (General)
Divisions: University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 47636
Date Deposited: 07 Aug 2007
Last Modified: 27 Mar 2014 18:31
Contact Email Address: dandolfa@sfu.ca
URI: http://eprints.soton.ac.uk/id/eprint/47636

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