Multiple steady states and indeterminacy in the Uzawa-Lucas model with educational externalities

This study attempts to endogenize educational efficiency, a critical exogenous parameter in the Uzawa-Lucas model, where human capital accumulation plays an important role in economic growth. Human capital accumulation is a puzzle; in addition to the broadly recognized positive spillover of human capital, educated human capital productivity occasionally shows a decreasing trend in the economic growth process (Jones in Q J Econ 110:495-525, 1995; Pritchett in World Bank Econ Rev 15(3):367-391, 2001). Incorporating these phenomena as educational externalities into the Uzawa-Lucas model, we analyze the properties of endogenous growth and stagnation. The model yields multiple steady states under intertemporal substitution elasticity larger than 1. The results reveal that a steady state with a higher growth rate demonstrates indeterminacy, and the selection of the steady states depends on expectation formation.