Endogenous growth, education subsidies, and intergenerational transfers Elena Del Rey * and Miguel-Angel Lopez-Garcia † July 2013 Abstract In this paper we investigate the welfare effects of both education subsidies and in- tergenerational transfers along an arbitrary, non-optimal balanced growth path in an overlapping generations model with both physical and human capital. A lump-sum transfer from the working middle-aged to the elderly translates into a lower accumula- tion of both physical and human capital (and thus a smaller growth rate). However, it can increase or decrease welfare. A change in the rate of education subsidy can have either a positive or a negative effect on the accumulation of both physical and human capital, but conditions that guarantee a clear-cut sign of the effect of education subsi- dies on welfare are derived. We also study the comparative dynamics when departing from the laissez-faire balanced growth path, and show that the intergenerational effects of the optimal policy are equivalent to those of a pure pay-as-you-go social security system. Keywords: endogenous growth, human capital, intergenerational transfers, education policy JEL Classification: D90, H21, H52, H55 ∗ Departament d’Economia, Universitat de Girona, 17071 Girona, Spain. E-mail: elena.delrey@udg.edu. † Corresponding Author: Departament d’Economia Aplicada, Universitat Autonoma de Barcelona, 08193 Bellaterra (Barcelona) Spain. E-mail: miguelangel.lopez@uab.es We gratefully acknowledge financial support from Instituto de Estudios Fiscales (Spanish Ministry of Fi- nances), the Spanish Ministry of Science (projects ECO2010-16353 and ECO2012-37572) and the Generalitat de Catalunya (contracts 2009SGR189 and 2009SGR600, and the XREPP).