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This paper constructs an overlapping generations model with a frictional labor market to explain persistent low education in developing countries. When parents are uneducated, their children often face difficulties in finishing school and therefore are likely to remain uneducated. Moreover, if children expect that other children of the same generation will not receive an education, they expect that firms will not create enough jobs for educated workers, and thus are further discouraged from schooling. These intergenerational and intragenerational mechanisms reinforce each other, creating a serious poverty trap. Escape from the trap requires the well-organized and combined implementation of a subsidy for schooling, the provision of free education, support for disadvantaged children, and public awareness programs.
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