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Optimal policies, middle class development and human capital accumulation under elite rivalry

Sochirca,E., P.C. Neves (2018), Optimal policies, middle class development and human capital accumulation under elite rivalry, CEFAGE-UE Working Paper 2018/04.
Abstract:

We build a dynamic model with endogenous middle class development, human capital accumulation and policy choices, in order to analyse the interactions between the optimal policies implemented by the rulling elite and the key drivers of economic growth in the presence of elite rivalry. We consider that: (i) the specic policy choices depend on economic and political incentives of the elite; (ii) the individuals' decisions regarding their childrens' education are endogenously determined by specic economic and political factors. Our results suggest that, contrarily to the economically motivated policies, the politically motivated policy choices imply innecient economic outcomes and limit the development of the middle class and human capital accumulation. The results also show that higher middle class and human capital accumulation growth rates can lower the degree of elite rivalry by reducing the level of the optimal tax rate, increase public investments in education and yield positive changes in all economic outcomes.

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