Optimal Human Capital Bequeathing
Julio Dávila  1@  
1 : Center of Operation Research and Econometrics [Louvain]  (CORE)  -  Website
34, Voie du Roman Pays B-1348 Louvain-la-Neuve -  Belgium

When parents endow their offspring with human capital and the effectiveness with which they do so depends on their own, the decentralized allocation of resources through markets cannot deliver, under laissez-faire, the benevolent planner's outcome maximizing the representative agent's welfare. Specifically, the market level of human capital is too low. Most importantly, this happens to be the case even when parents internalize perfectly in their utility the value of their investment for their children. The problem is not therefore one of an externality not internalized, but rather the impossibility of replicating in a decentralized way, under laissez-faire, the kind of intergenerational coordination that a benevolent planner can achieve. The planner's allocation can nonetheless be decentralized through the market subsidizing labor income at the expense of a lump-sum tax on saving returns.


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