Macrodynamic Implications of Income-Transfer Policies for Human Capital Investment and School Effort

The distortion in educational investment in poorer childrenis often attributed to credit market imperfections and henceto the unequal access of children to educational opportunity.However, the distortion might also be attributable to disincentiveeffects that cause children to make inefficient use of educationalopportunities. This possibility is demonstrated for an overlappinggenerations economy with multiple family dynasties in which childrenhave random unobservable abilities and base their school efforton their parents after-tax returns to schooling. Income redistributioncan result in suboptimal effort choices that offset the beneficialeffects of income transfers and sharply lower social welfare.