Does the impact of private education on growth differ at different levels of credit market development?

Abstract

Using an overlapping generations model, we show that the impact 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. Employing cross-country data, we find that reduced-form growth relationships are statistically significant and robust under various controls and samples. We also lay out conditions under which economies with missing credit markets are dynamically efficient and outperform, in terms of growth, economies with complete credit markets. The latter may explain large cross-country differences in savings and growth, while facilitating the evaluation of policies on financing education.

Heterogeneous Bequests and Social Inequalities

“…Indeed, the higher is π, the lower is the interest rate, which reduces individual's incentive to save. 10 The disposable income of the more altruistic agents is determined mainly by bequests. Therefore, their consumption also tends to decrease, which lowers their steady-state utility.…”

On the causality between household and government spending on education: evidence from a panel of 40 countries

“…One of the mediator variables that we consider is a proxy for credit market constraints which differ significantly across countries. Hatcher and Pourpourides (2022) construct a cross-country indicator that measures the extent of credit provision which hints that countries with minimal credit market development tend to exhibit high intensities of household investment in education. 6 Their findings regarding the significance of credit constraints in driving educational attainment are consistent with the findings of most studies in the literature (e.g.…”

“…8 On the other hand, De Gregorio (1996), highlights the significance of human capital within the context of an OLG model and shows that borrowing constraints may lower growth as they decrease the incentive to study for young individuals who choose to enter the work force early. Hatcher and Pourpourides (2022) allow within family transfers for education purposes and provide an interpretation that somehow compromises the conflicting findings for the impact of borrowing constraints on growth. Specifically, they show conditions which depend on the level of private financing of education where low credit market development implies a negative effect of private financing of education on growth whereas adequately developed credit markets imply a positive effect.…”

“…Specifically, they show conditions which depend on the level of private financing of education where low credit market development implies a negative effect of private financing of education on growth whereas adequately developed credit markets imply a positive effect. 9 Kitaura (2012) and Hatcher (2022) further argue that the effects of borrowing constraints on welfare differ across generations.…”