We present evidence that measures of "social cohesion," such as income inequality and ethnic fractionalization, endogenously determine institutional quality, which in turn causally determines growth. Copyright 2006 Blackwell Publishing Ltd.

We present evidence that measures of "social cohesion," such as income inequality and ethnic fractionalization, endogenously determine institutional quality, which in turn casually determines growth.The Center for Global Development is an independent think tank that works to reduce global poverty and inequality through rigorous research and active engagement with the policy community. This Working Paper was made possible in part by funding from the William and Flora Hewlett Foundation.Use and dissemination of this Working Paper is encouraged, however reproduced copies may not be used for commercial purposes. Further usage is permitted under the terms of the Creative Commons License. The views expressed in this paper are those of the author and should not be attributed to the directors or funders of the Center for Global Development.

SUMMARY Empirical evidence does not agree with the investment‐model of the demand for education: out of pocket costs have another impact than earnings foregone. This difference can be explained by consumption motives. The demand for education is then greater, the full price of education exceeds discounted future incremental earnings, net discounted wealth is not maximum and the rate of return to marginal investments in education is smaller than the interest rate.

This paper compares higher education policies across thirty two European countries, using the contribution to economic innovation as a benchmark for the comparison. We suggest that an increase in university autonomy and public funding, that we qualify as 'empowerment', positively affects the research and education performance of universities, and more importantly the innovation potential of countries. We subsequently formulate policy related recommendations for Europe.