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In every society to attain higher rate of economic growth and efficiency, it is important that individuals with high abilities and talents acquire skills through higher education. The process of human capital accumulation begins with parent’s investment on the agent when he/she is a child. An important controversy in modeling such decision has been the issue of what is the motive for parents’ investment in their children’s human capital. A commonly observed fact is that while in all countries parents invest a substantial amount of resources in the human capital of children, in less developed countries substantial resource transfers occur from children to parents, whereas such resource transfers from children to parents are thinner in developed countries. These transfers patterns are sometimes used to postulate the hypothesis that in less developed countries parents’ investment in their children is more like lending to children; whereas in developed countries parents’ investment in their children is mainly due to the fact that parents are altruistic towards their children. These two different motives have different implications for growth and efficiency. Since parents can observe the children’s abilities, and society cannot, under the first motive removing the credit constraints of the poorer parents will lead to higher growth and efficiency, whereas, under the altruism motive, there is always over-investment in less able children and thus lower growth and efficiency. Thus under the first motive the society can and under the second motive the society cannot rely on parents for attaining efficiency in allocation of educational investments. In this paper we first address these issues in a theoretical model, and then we use the Indonesian Family Life Survey (IFLS) data set to find evidence of Indonesian parents’ motive.

The paper is jointly with Paitoon Weiboonchutikula, and Bangorn Tubtimtong. The paper was presented by Paitoon Weiboonchutikula)

This paper provides a model of intergenerational social mobility and economic growth, in which innate ability of workers, and the type of their education and jobs determine the rate of technological progress and social mobility. The innate ability and hence productivity level of an individual is private knowledge. Education not only increases productivity level, more so for the higher ability individuals, it also acts as a signaling device for one’s innate productive ability for the purpose of job matching in the labor market. It is shown that in economies with one-time non-renegotiable wage contracts, there are generally multiple signaling equilibria, all being far away from generating the maximum attainable rate of social mobility and economic growth. There are no natural economic grounds that can guide to select a particular equilibrium. Various labor market practices such as quit, layoffs and promotions based on worker’s or employer’s subjective assessment of on-the-job realized productivity, or explicit wage contracts contingent on some publicly observed noisy measurement of realized productivity, can improve some of the inefficiencies, and hence increase the rate of economic growth and social mobility. The remaining inefficiencies, however, can only be removed by intervening in the education system. The paper analyzes briefly a few education systems, and within the dual private-public education system, the paper examines the role of school vouchers or subsidies to the children of poorer family backgrounds in improving the rate of economic growth and social mobility.