The role of educational quality and quantity in the process of economic development

► We develop a theory of human capital investment to study the channels through which students react to school quality when deciding on investments in secondary education and above, and to study how educational quality affects economic growth. ► In a dynamic general equilibrium closed economy, primary education is mandatory but there is an opportunity to continue on in education, which is a private choice. High quality education increases the returns to schooling, and hence the incentives to accumulate human capital. This is caused by two main effects: an extensive channel, and an intensive channel. Furthermore, educational quality plays a central role in explaining the composition of human capital and the long-run level of income. ► Cross-country data evidence shows that the proposed channels are quantitatively important and that the effect of the quality and quantity of education on growth depends on the stage of development.