An Optimal-Control-Theory Approach to the Education-Investment Decision

This paper presents an optimal-control-theory model that maximizes the present value of future earnings for an individual—particularly a poor one. Income is assumed to be a function of age and education level, and the rate of schooling is the control variable. A linear tax function is assumed that admits a negative income tax. In spite of numerous difficulties in measuring certain parameters, regression analysis is used to fit income data to age and education level. Then some specific functions for the optimal education plan are derived for different parameter values. The sensitivity of the model to changes in certain controllable and noncontrollable parameters is analyzed, and some implications for government policy are found.