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Iowa State University

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ISU Economic Report Series

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Human Capital Investment And The Locally Rational Child, Peter F. Orazem, Leigh Tesfatsion May 1993

Human Capital Investment And The Locally Rational Child, Peter F. Orazem, Leigh Tesfatsion

ISU Economic Report Series

This study analyzes an overlapping generations economy with multiple family dynasties in which the abihty levels of children are random and unobservable. Each parent allocates his income between consumption and investment in the education of his child. Each child, in turn, decides how much effort toexert in school on the basis of his perceived marginal returns to schooling, a perception shaped in part by the child's perception ofthe marginal returns to "schooling attained by his parent. The income tax policies available to government range from hbertarian (no redistribution) to perfectly egalitarian (equalization of after-tax family incomes in each period ...