Optimizing Public Investment: Choosing between Physical and Human Capital when the Rate of Return to Physical Capital Exceeds that of Human Capital

DOI

10.2991/978-94-6463-906-3_28How to use a DOI?

Keywords

Endogenous growth; Physical capital subsidies; Human capital subsidies; Borrowing constraints

Abstract

A government has collected 1 million USD in taxes; should it build more schools or more factories? How should the government redistribute current income in an economic environment where more education by private agents crowds out physical capital, causes an excessive increase in the rate of return to physical capital relative to human capital, and lowers economic growth? Should the government redistribute current income by subsidizing human capital or physical capital accumulation? We compare these two policy options in a heterogeneous two-sector OLG model with model features tailored to those of least developed countries (LDCs). Both policies are growth-improving, but only the subsidization of human capital accumulation is welfare-improving. Moreover, subsidizing human capital accumulation also causes more economic growth than subsidizing physical capital accumulation. In accounting for growth, we found that the general equilibrium effect greatly dominates that of physical capital in our educational subsidies model. In contrast, the physical capital effect dominates the general equilibrium effect in our physical capital subsidies model. Overall, our results support direct government policies that subsidize human and physical capital accumulation in LDCs, but not government action that indirectly relaxes borrowing constraints, for example, deregulating the private student credit market.

Copyright

© 2025 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Emmanuel Ameyaw
PY  - 2025
DA  - 2025/12/12
TI  - Optimizing Public Investment: Choosing between Physical and Human Capital when the Rate of Return to Physical Capital Exceeds that of Human Capital
BT  - Proceedings of Botho University International Research Conference (BUIRC 2025)
PB  - Atlantis Press
SP  - 447
EP  - 457
SN  - 3005-155X
UR  - https://doi.org/10.2991/978-94-6463-906-3_28
DO  - 10.2991/978-94-6463-906-3_28
ID  - Ameyaw2025
ER  -