Government and Household Expenditure on Education: The Role of Credit Constraint

Human capital accumulation is one of the most important factors of economic growth for both developed and developing nations. The central research question of this paper is to evaluate the tendency of household educational spending vis-à-vis government spending on education, given the household’s credit constraints. For this purpose, use annual data of 40 countries from 2004 to 2018 in this paper. The intensity of government and household expenditures on education is a more appropriate indicator to analyze the impact of human capital on economic development. This paper has applied the Fixed effect and the random effect model. The Panel Corrected Standard error (PCSEs) model to tackle the problem of heteroscedasticity, Serial Correlation of AR (1), and Cross-sectional dependence. For testing stationarity of the variables, the second generation panel unit root test is Im-Pesaran and Shin (IPS) Test at level and difference. As a robustness test, I estimated a VAR (3) and computed the Impulse response function using Cholesky decomposition along with a 95% confidence interval. The current study concludes that the causality runs from household expenditures (HEX) to government expenditure (GEX) on education directly and not the other way round. This paper also finds a negative contemporaneous relationship between GEX and NPL at the 5% significance level. This means that as households become more credit-constrained, the government tends to spend less on education.