Public Subsidy on Education and Welfare in Small OECD Countries: A Theoretical and Empirical Reconciliation

As per the conventional wisdom there should be provision for public assistance for skill acquirement for achieving higher economic growth in the future. However, empirical observations on small OECD countries over the period 2001-2011 tell somewhat a different story. This study makes an attempt in explaining those atypical findings, first theoretically by means of a simple dynamic two-sector, specific factor general equilibrium framework with endogenous skill formation and provision for public subsidy on education and then empirically with the help of conventional unbalanced panel data models. The analysis questions the desirability of the public subsidy policy on education in improving intertemporal social welfare in a small open developed economy.