| Summary: | This paper constructs a neoclassical life-cycle growth model which allows for investment not only in tangible capital but in education. We consider an economy in which individuals live for two periods, devoting a fraction of time to schooling in the first period while working full time in the second. Each person has a utility function dependent on education as well as present and future consumption. He chooses the amount of schooling and the rate of saving so as to maximize utility. Based on these individual decisions and the production function, we derive the aggregate demand for and supply of labour functions. The short-run and long-run equilibrium conditions are then analysed, and the implications for economic policy are considered. This paper extends and generalizes the works of Becker [2], Ben Porath [3], Diamond [5], Oniki [11], Razin [12], Schultz [15], Weiss [16] and others. The life-cycle growth model of Diamond [5] ignores the investment in human capital. The studies of the demand for education by Oniki [11] and Weiss [16] neglect the saving-consumption decisions, while that of Ben Porath [3] uses only a partial equilibrium framework. Razin [12] constructs a continuous general equilibrium model; however, his assumption that individual households have an infinite horizon implies that the utility and ability obtained through education can be bequeathed by one generation to the other; moreover, education involves no direct cost. These two assumptions have obscured the policy implications of his model.
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