Private financing of education, incomplete credit markets and economic growth

Hatcher, Michael and Pourpourides, Panayiotis M. (2018) Private financing of education, incomplete credit markets and economic growth (Cardiff Economics Working Papers, E2018/26) Cardiff. Cardiff University 39pp.

Record type: Monograph (Working Paper)

Abstract

We present cross-country evidence showing that most parents pay for their children’s education and that intensities of private financing of education vary substantially across countries, with high intensity levels in East and South Asia, and relatively low intensity levels in western economies. We build a model in which the impact of the intensity of private financing of education on growth depends on credit market development, being positive when credit markets are adequately developed, but negative if sufficiently low levels of credit market development occur alongside relatively high private financing intensities. Using a newly constructed cross-country index on credit market development, we estimate the reduced-form relationships implied by the model
and find that they are not only statistically significant but also highly robust under various controls and samples. We also demonstrate conditions under which incomplete credit markets increase growth and do not preclude dynamic efficiency. The channels of private financing of education coupled with different levels of credit market development may help to explain cross-country differences in saving and growth that the literature has hitherto had difficulty explaining.

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