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. T he interaction between these two intergenerational externalities leads to r ich dynamics. First, starting with too high aspirations or with too low hum an capital will conduct the economy into a poverty trap. Second, the growth rate and the savings rate are characterized by oscillations. Third, a repe lling cycle may delimit a basin of attraction around the balanced growth pa th: 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 rig hts reserved.