Public education expenditures, human capital investment and intergenerational mobility: A two-stage education model

ABSTRACT We show in this paper that, depending on the initial distribution of material wealth and that of individuals’ abilities, economies converge in the long run towards different proportions of the skilled workforce and different levels of average wealth. We also show that the growth process raises net economic mobility, the long‐run proportion of the skilled population and the long‐run levels of wealth held by both rich and poor dynasties. Unless the income tax rate is too high, the increase in total public funds is associated, in the long run, with higher net mobility, a larger fraction of the skilled workers and higher levels of wealth of all the dynasties. In addition, the reallocation of public expenditures from basic to advanced education can result in lower mobility, a lower long‐run size of the skilled workforce, and a lower long‐run level of wealth held by rich dynasties, if the transfer of resources comes at the expense of excessively lowering the quality of education at the basic schooling level.