Schooling and public capital in a model of endogenous growth

This paper studies the allocation of public spending between education services and infrastructure investment in an endogenous growth model of a developing economy where public capital in infrastructure affects human capital accumulation. The balanced growth path is derived and the possibility of local indeterminacy is discussed. Dynamics associated with a budget-neutral reallocation of spending from education to infrastructure are studied through numerical simulations. The growth-maximizing share of investment in infrastructure is shown to depend on the goods production technology and the 'productiveness' of infrastructure in the schooling technology. Properties of the welfare-maximizing solution are also discussed. © The London School of Economics and Political Science 2009.