Public education and capital accumulation

I study an overlapping generations model where physical and human capitals are inputs of production that can be accumulated by withholding resources from current consumption. Human capital is the output of a schooling system which can be financed either by private expenditures, or by taxes, or by a combination of both. In a political equilibrium with majority voting, public school financing turns out to be an instrument to solve a 'free rider problem'. By improving the skills of the next period's workers it increases the expected return on physical capital, something which cannot be achieved by means of private expenditure in education only. When financed by a uniform income tax, public schools are also an instrument for intergenerational redistribution. Depending on initial conditions, the model predicts either a poverty trap (poor societies invest too little in education) or persistent growth driven by the accumulation of human capital. The introduction of public financed education shrinks the set of initial conditions leading to the poverty trap. I characterize the global dynamics of the model, which delivers a number of testable hypotheses on the relation between income growth, capital accumulation and the development of public education. Throughout the paper, I concentrate on specific functional forms allowing for a closed form solution, nevertheless, all the important results carry over to fairly general utility and production functions.