Published online by Cambridge University Press: 30 April 2019
We examine how a subsidy policy for encouraging more individuals to pursue higher education affects economic growth in an overlapping generations model of R&D-based growth, including both product development and process innovation. We show that such a policy may have a negative effect on the long-run economic growth rate. When the market structure adjusts partially in the short run, the effect of an education subsidy on economic growth is ambiguous and depends on the values of the parameters. However, when the market structure adjusts fully in the long run, the education subsidy expands the number of firms but reduces economic growth. These unfavorable predictions of an education subsidy on economic growth are partly consistent with the empirical findings that mass higher education does not necessarily lead to higher economic growth.
We are grateful for helpful comments from the associate editor, two anonymous referees, Tetsugen Haruyama, Ken-ichi Hashimoto, Akira Momota, Akihisa Shibata, Daishin Yasui, and seminar participants at Yamaguchi University and Kumamoto Gakuen University. All remaining errors are our own. Financial support from the Grant-in-Aid for Scientific Research (C) from the Japan Society for the Promotion of Science No. 17K03638 is gratefully acknowledged.