Growth dynamics and education spending: The role of inherited tastes and abilities

We present an overlapping generations model with endogenous growth in which children inherit human capital and standard-of-living aspirations from the previous generation. Adults evaluate their own consumption with respect to a baseline-requirement which depends on their parents' past consumption. The interaction between these two intergenerational externalities leads to rich dynamics. First, starting with too high aspirations or with too low human capital will conduct the economy into a poverty trap. Second, the growth rate and the savings rate are characterized by oscillations. Third, a repelling cycle may delimit a basin of attraction around the balanced growth path: this may lead countries starting with too high human capital to a boom followed by an irreversible decline. (C) 2001 Elsevier Science B.V. All rights reserved.