Public versus private investment and growth in a hierarchical education system

The paper studies the interaction between public and private spending in a two-stage education framework (K-12 and tertiary education) and their e¤ects on economic growth. We …nd that an increase in the overall educational public spending crowds out the total level of private contributions and increases the share of resources that households devote to K-12 education. For a given public budget, a higher share of K-12 public funding prompts households to spend more on education overall and at the same time, to allocate a higher share of their investments towards higher education. We show that the growth maximizing share of public spending devoted to K-12 should be high, irrespective of the size of the public budget and that increased enrollment in tertiary education does not always translate into higher growth. Moreover, to maximize growth, high tax countries should use more of their public resources in tertiary education relative to low tax countries. Our model is broadly consistent with data on education …nance in OECD countries. It also suggests that US e¤orts to improve K-12 education and the reform of higher education in Europe are consistent with the objective of increased economic growth. JEL classi…cation: I22, I28, H23, H52