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The University of Southampton
EconomicsPart of Economic, Social and Political Science

1904 Parental Transfers, Incomplete Credit Markets and Economic Growth

First draft: December 15, 2019


We present cross-country evidence suggesting that there is a statistically robust association between the intensity of household expenditures on education and economic growth: positive at relatively high levels of credit market development and negative at relatively low levels. The evidence also shows that 86% of parents pay for their children's education, while the intensity of parental transfers towards the education of their children varies significantly across countries. Using an overlapping generations framework, we investigate the impact of the intensity of parental financing of children's education on economic growth, under complete and incomplete credit markets for education loans. Among others, we justify theoretically the empirical finding of the negative relationship between growth and the intensity of household spending on education under missing financial markets. We also demonstrate conditions under which incomplete financial markets, in the presence of the parental altruism motive, increase economic growth and do not preclude dynamic efficiency.

Michael Hatcher
Economics Department, University of Southampton

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