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Education, Political Instability, and Growth, Research Paper 9737

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Education, Political Instability, and Growth, Research Paper 9737

DATE: December 1997

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ABSTRACT: Empirical evidence suggests a positive association between income levels and growth rates on the one hand, and political stability and educational attainment on the other. This paper develops a simple finite—horizon overlapping growth model that in the absence of institutions for precommitment has a political equilibrium with inefficiently low growth, low educational attainment, and high returns to schooling. In the model, the laissez-faire growth rate is inefficient due to an intergenerational externality in the decision to accumulate knowledge. We then contrast the efficient growth rate with the outcome when there is a sequence of governments with an objective that reflects the preferences of the individuals currently alive. The result is an equilibrium in which growth remains inefficiently low because future agents are unable to reward those currently alive to induce them to accumulate knowledge. The ability to achieve higher efficient growth hinges on either the government's ability to set policies that cannot be undone by subsequent governments, or on an alternative "trigger strategy" equilibrium in which each government believes it will be punished by the next if it deviates from the optimal policy.

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Kahn, James A. (James Allan). "Education, Political Instability, and Growth, Research Paper 9737," Research Papers (Federal Reserve Bank of New York) (December 1997). https://fraser.stlouisfed.org/title/6570/item/615589, accessed on March 31, 2023.

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THEMES: CLASSIFICATION:
  • lcc: HG136 .R45 no.9737
IDENTIFIERS:
  • oclc: 38919752
  • repec: fip:fednrp:9737
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