Higher Education Subsidy Policy and R&D-based Growth

Employing a two-period overlapping generations model of R&D-based growth with both product development and process innovation, this paper examines how a subsidy policy for encouraging more individuals to receive higher education affects the per capita GDP growth rate of the economy. We show that when the market structure adjusts partially in the short run, the effect of an education subsidy on economic growth is ambiguous and depends on the values of the parameters. However, when the market structure adjusts fully in the long run, the education subsidy expands the number of firms but reduces economic growth. These unfavorable predictions for the education subsidy on economic growth are partly consistent with empirical findings that mass higher education does not necessarily lead to higher economic growth. A higher education subsidy policy is perhaps inappropriate for the purpose of stimulating long-run economic growth.