Learning or Doing?.

We consider a two-period overlapping generations economy in which individuals work in both periods and acquire skills when young through both learning-by-doing and formal education. We characterise the unique saddle-path stable steady state of this economy and show that individuals spend too much (too little) time in formal education when the economy is dynamically inefficient (efficient). Overeducation is, therefore, linked to overaccumulation of physical capital. Finally, we show that the social planner can decentralise the golden rule by issuing public debt when the laissez-faire economy is dynamically inefficient; there is no room for education policy in the absence of social externalities in the process of skill acquisition.