In this paper, we present an overlapping generations model with heterogeneous agents in which human capital investment through formal schooling is the engine of growth. We use simple functional forms for preferences, technologies, and income distribution to highlight the distinction between economies with public education and those with private education. We find that income inequality declines more quickly under public education. On the other hand, private education yields greater per capita incomes unless the initial income inequality is sufficiently high. We also find that societies will choose public education if a majority of agents have incomes below average.

The purpose of this paper is to review some of the recent developments in endogenous growth models. Specifically, our focus is on the growth effects of productive government spending in dynamic general equilibrium models. We use a simple overlapping generations model as our basic framework and illustrate the role of taxes and spending. We then examine several related issues: nonrivalry in publicly provided goods, existence and uniqueness of competitive equilibrium, endogenous public policy, ways of financing public expenditures, composition of publicly provided goods and services, and private alternatives. Finally, we review some empirical results related to output elasticity of public capital and educational expenditures.

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