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Should a Country Invest more in Human or Physical Capital? A Two-Sector Endogenous Growth Approach

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  • Marion Davin

    ()
    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)

  • Karine Gente

    ()
    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)

  • Carine Nourry

    ()
    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)

Abstract

Should a country invest more in human or physical capital? The present paper addresses this issue, considering the impact of different factor intensities between sectors on both optimal human and physical capital accumulation. Using a two-sector overlapping generations setting with endogenous growth driven by human capital accumulation, we prove that relative factor intensity between sectors drastically shapes the welfare analysis: two laissez-faire economies with the same global capital share may generate physical capital excess or scarcity, with respect to the optimum. The model for the Japanese economy, that experienced a factor intensity reversal after the oil shock, is then calibrated. It is shown that Japan invested relatively too much in human capital before 1975, but has not invested enough since 1990.

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Bibliographic Info

Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1330.

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Length: 23 pages
Date of creation: May 2013
Date of revision: May 2013
Handle: RePEc:aim:wpaimx:1330

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Web page: http://www.amse-aixmarseille.fr/en
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Keywords: Endogenous growth; social optimum; two-sector model; factor intensity differential;

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  1. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1403-1448, November.
  2. Frederic, DOCQUIER & Oliver, Paddison & Pierre PESTIEAU, 2006. "Optimal accumulation in an endogenous growth setting with human capital," Discussion Papers (ECON - Département des Sciences Economiques) 2006022, Université catholique de Louvain, Département des Sciences Economiques.
  3. Boldrin, Michele & Montes, Ana, 2002. "The Intergenerational State: Education and Pensions," CEPR Discussion Papers 3275, C.E.P.R. Discussion Papers.
  4. Areendam Chanda, . "The Rise in Returns to Education and the Decline in Household Savings," Departmental Working Papers 2005-05, Department of Economics, Louisiana State University.
  5. Akos Valentinyi & Berthold Herrendorf, 2008. "Measuring Factor Income Shares at the Sector Level," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 820-835, October.
  6. Kazuo Mino & Kazuo Nishimura & Koji Shimomura & Ping Wang, 2005. "Equilibrium Dynamics in Discrete-Time Endogenous Growth Models with Social Constant Returns," Discussion Papers in Economics and Business 05-34, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  7. Bond, Eric W. & Wang, Ping & Yip, Chong K., 1996. "A General Two-Sector Model of Endogenous Growth with Human and Physical Capital: Balanced Growth and Transitional Dynamics," Journal of Economic Theory, Elsevier, vol. 68(1), pages 149-173, January.
  8. Zuleta, Hernando & Young, Andrew T., 2013. "Labor shares in a model of induced innovation," Structural Change and Economic Dynamics, Elsevier, vol. 24(C), pages 112-122.
  9. Marion Davin & Karine Gente & Carine Nourry, 2011. "Social Optimum in an OLG Model with Paternalistic Altruism," Working Papers halshs-00644094, HAL.
  10. Takahashi, Harutaka & Mashiyama, Koichi & Sakagami, Tomoya, 2012. "Does The Capital Intensity Matter? Evidence From The Postwar Japanese Economy And Other Oecd Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S1), pages 103-116, April.
  11. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, vol. 60(6), pages 1351-86, November.
  12. David Evans & Haluk Sezer, 2004. "Social discount rates for six major countries," Applied Economics Letters, Taylor & Francis Journals, vol. 11(9), pages 557-560.
  13. Cremers, Emily T., 2006. "Dynamic efficiency in the two-sector overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 1915-1936, November.
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