Parental nurturing and adverse effects of redistribution

Abstract

This paper suggests that if parental nurturing is a dominating force in human capital formation then income redistribution may not promote economic growth. In particular, if, consistently with empirical evidence, parental human capital complements investment in a child’s education and yields increasing returns in the intergenerational production of human capital, income redistribution may have an adverse impact on the growth rate of average human capital. Redistribution shifts resources towards the less educationally-productive families and thus in the presence of credit markets imperfections and increasing returns, it reduces the aggregate level of investment in human capital. Moreover, if the degree of increasing returns is sufficiently large to produce sustained growth, this adverse effect on human capital formation may outweigh the conventional beneficial effects of redistribution that arises from the interaction between a production technology exhibiting diminishing returns and credit market imperfections.