Optimal Public Investments in Education and Endogenous Growth.

Optimal public investments in human capital through subsidizing private education or providing public education are considered in an endogenous growth model with externalities. Subsidizing private education stimulates growth, improves welfare, and has no distributional effect. While reducing income inequality as in the literature, public education hinders the growth of the average income unless externalities are strong enough and reduces the welfare of the median agent unless initial income inequality is sufficiently high. Societies with high income inequality may provide public education and will replace it with subsidized private education in some future periods as income converges. Copyright 1996 by The editors of the Scandinavian Journal of Economics.