Population aging, human capital accumulation, and coordination of policies

Abstract

We construct an overlapping generations model in which the government chooses the tax rate that determines publicly provided education and healthcare. Education increases human capital accumulation, and healthcare improves life expectancy. Each policy is financed by taxes. Two sectors of government, the public education and public healthcare sectors, uncooperatively determine the tax rates for education and healthcare that maximize the GDP per capita and an adult’s welfare. Our main findings are as follows. First, the optimal tax rates for both branches of government based on per capita GDP maximization are uniquely determined. Second, in the case based on welfare maximization, there are multiple equilibria that can be ranked. The conclusion relies on the strategic complementary relationship between public education and healthcare, and the result is consistent with empirical data.