The Effect of Public Transfers on Physical and Human Capital Accumulation

Using a model with heterogeneous agents, this article demonstrates how public transfers affect physical as well as human capital accumulation. An increase in public income transfer from the rich agent to the poor agent will decrease (or increase) both physical and human capital accumulation if the poor agent has a higher (or lower) rate of time preference than the rich agent. An income transfer has no effect on physical and human capital accumulation if the poor agent and the rich agent have the same rate of time preference. A transfer from the rich agent to the poor agent through public education expenditure will decrease the physical capital but may either increase or decrease total human capital depending on the productivity of government education expenditure and other conditions.