In this paper I show that persistent inequality in the distribution of human capital and a negative relation between initial inequality and steady‐state aggregate output may follow from the fact that the poor require relatively higher returns to increase expenditure on education. Moreover, I show that poverty traps emerging in models where individual transitions do not depend on aggregate dynamics, though not robust to the introduction of idiosyncratic uncertainty, may still be relevant observationally, if idiosyncratic shocks occur with low probability. In this context, I also analyse the implications of introducing a public education system.

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This paper develops a model of endogenous growth with overlapping generations to investigate the joint determination of social security, public investment and growth in a small open economy. W e argue that a pure pay-as-you-go system provides the taxpayers with the incentives to support growth-oriented policies, which increase the future productivity of labor. We nd that outcomes characterized by positive levels of intergenerational redistribution, public investment and long run growth can be sustained as subgame-perfect Nash equilibria of an innitely repeated intergenerational game, if and only if the marginal productivity of public capital is large enough. Furthermore, we show that transfers either comove with public investment and growth or display a non-monotonic relation, where they initially increase along with public investment and growth and then decrease. (JEL, E62, H55) 3 We are greatly indebted to Roberto Perotti and Jos e-Victor Rios-Rull for their help and encouragement. We have also beneted from comments and suggestions