Does Government Spending on Education Promote Growth and Schooling Returns?

Since human capital is a major driver of growth, the conventional wisdom suggests that the government should direct more resources to education. However, surprisingly the cross country data show little positive correlation between growth and public spending on education. In fact, the pattern is rather puzzling. Public spending on education tends to depress schooling return. The relationship between growth and education appears nonlinear. In this paper, we revisit this issue and try to understand these puzzling facts in terms of an endogenous growth model. We model return to schooling by adopting an asset pricing approach and show the explicit linkage between government intervention and growth via this schooling return.