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Pareto-Improving Intergenerational Transfers.

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Pareto-Improving Intergenerational Transfers.

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Abstract

In the presence of endogenous growth intergenerational transfer from the young to the old reduce per capita income growth and harm future generations. On the other hand, competitive equilibria are inefficient if externalities sustain long-run growth. This paper shows that if individuals retire in the last period of their life, the inefficiency of the market economy can be removed by an investment subsidy without making the current or future generations worse off only if coupled with intergenerational transfers from the young to the old. Copyright 2001 by Oxford University Press.

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... On the other hand, it is worth mentioning that any growth path of the model (as in other models of endogenous growth) is dynamically efficient in the sense that it is not possible to raise consumption in all periods by just ''eating'' a fraction of the capital stock. However, as shown in a recent paper by Wigger (2001), the impossibility of dynamic inefficiency in models of endogenous growth does not preclude the possibility of Paretoimproving intergenerational transfers. In the following, I rule out other policy instruments such as capital taxation or intergenerational transfers, and turn to the second-best analysis within the policy regime in which labor taxation is the only available policy instrument. ...
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... Another approach was developed by Wigger (2001), who argues that an education subsidy financed by a lump-sum tax can be welfare-enhancing in a closed economy with a constant population, provided the cross derivative of the production function between human capital and physical capital is positive and sufficiently large. Additional empirical studies on the importance of education for economic growth can be found in De Fuentes (2003), Hanushek and Woessmann (2010) and the references therein. ...
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