Abstract
We build a dynamic model with endogenous middle class development, human capital accumulation, and policy choices, in order to analyze the interactions between the optimal policies implemented by the ruling elite and the key drivers of economic growth in the presence of elite rivalry. We consider that: (1) the specific policy choices depend on economic and political incentives of the elite; (2) the individuals’ decisions regarding their children’s education are endogenously determined by specific economic and political factors. Our results suggest that, contrarily to the economically motivated policies, the politically motivated policy choices imply inefficient economic outcomes and limit the development of the middle class and human capital accumulation. The results also show that higher middle class and human capital accumulation growth rates can lower the degree of elite rivalry by reducing the level of the optimal tax rate, increase public investments in education, and yield positive changes in all economic outcomes.
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Notes
This is related with a branch of literature that models the endogenous choice of individuals regarding education. For example, Hayakawa and Venieris (2019)consider that the individual’s decision regarding how much human capital to accumulate is endogenously determined as a response to technological innovations. In particular, in a context in which various qualities of human capital are complementarity to the production of each other, human capital accumulation by the rich and the poor individuals exhibits strategic complementarities. These complementarities, in turn, tend to increase labour productivity, promote economic growth, and reduce income inequality.
The middle class is generally growing in the developing countries, but the numbers are particularly high in Asia, where it is estimated to come to represent two-thirds of the global middle class population by year 2030. On the contrary, in the developed North-American and European economies, the middle class is large but stagnating (Kharas 2017).
Thus, throughout the paper we use the terms “skilled workers” and “middle class” synonymously.
As we will show in Sect. 2.3, the output tax is endogenously determined depending on the specific incentives of the political elite.
We also consider that in each period t a fraction \(\delta\) of capital depreciates.
Henceforth we will refer to rearing children to become skilled or unskilled workers, simply as having skilled or unskilled children.
The cost of having children (who will become either skilled or unskilled workers) is also assumed to be convex in order to reflect the idea that the cost of raising an additional child is increasing in the number of children.
Note that the number of children in period t is denoted with the subscript \(t+1\) to reflect the idea that they will determine the adult population in \(t+1\).
That is, when they become either skilled or unskilled workers.
This dichotomous presentation of the exerted effort is a simplification adopted in order to keep the model analytically treatable. In reality, this effort is continuous and the distinction between a skilled and an unskilled worker in some cases may not be so clear. For example, a more detailed modeling approach could assume that there exists a threshold below which workers are considered to be unskilled.
Note that, similarly to production decisions, the optimal number of skilled children, \(n_{t+1}^{m}\) is decided after observing the tax rate announced by the elite for the next period, \(\tau _{t+1}\).
Given that in each individual period t the positive difference between \(V^{P}(P)\) and \(V^{P}(M)\) cannot be excessive, we consider that \(V^{P}(P)-V^{P}(M)<1\) .
See footnote 12.
To simplify the notation, the index t will be dropped from the expressions presented in this section.
A corollary of the analysis in Sect. 3.1 is that, under elite rivalry, a lower tax rate increases tax revenues.
Note that, the condition \(\Upsilon <1\) is also satisfied for some values of \(\theta >0.5\), given that the remaining components of \(\Upsilon (\tau ^{ER})\) all assume values below 1.
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Acknowledgements
E. Sochirca acknowledges valuable comments by Francisco Veiga and the financial support from Fundação para a Ciência e a Tecnologia (FCT), Portugal, through grant SFRH/BPD/109307/2015. P.C. Neves acknowledges financial support from FCT through grant UIDB/04007/2020.
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This paper won the Best Paper Award in the 29th EBES Conference, which was held in Lisbon, Portugal on October 10–12, 2019.
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Sochirca, E., Neves, P.C. Optimal policies, middle class development and human capital accumulation under elite rivalry. Eurasian Econ Rev 10, 727–744 (2020). https://doi.org/10.1007/s40822-020-00150-5
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DOI: https://doi.org/10.1007/s40822-020-00150-5