Effects of educational subsidies and pay-as-you-go pensions on long-run growth under an endogenous growth model*

This study considers a three-period overlapping generations model with an endogenous growth setting, in which an agent borrows in the first period and repays the loan in the second period under a perfect credit market. Two educational subsidy schemes are considered: one is provided when an agent borrows and the other is provided when the agent repays his or her loan. This study compares the growth rates under each educational subsidy scheme for a balanced growth path and provides the sufficient conditions under which the growth rate in one scheme is larger than that in the other. A key to determining the size relationship of growth rates is whether the production of goods and services is physical-capital-intensive. Namely, when the production is sufficiently physical-capital-intensive, the interest rate in the credit market tends to be high, which discourages an agent from borrowing for his or her human capital investment. Hence, in this situation, an educational subsidy should be provided when an agent borrows to achieve a higher growth rate. If the production is not so physicalcapital-intensive, with some additional conditions, educational subsidies should be provided when an agent repays his or her loan to achieve a higher growth rate.