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Income taxes, subsidies to education, and investments in human capital

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  • C. Mendolicchio
  • D. Paolini
  • T. Pietra

Abstract

We study a two-sector economy with investments in human and physical capital and imperfect labor markets. Human and physical capital are heterogeneous. Workers and firms endogenously select the sector they are active in, and choose the amount of their sector-specific investments in human and physical capital. To enter the high-skill sector, workers must pay a fixed cost that we interpret as direct cost of education. Given the distribution of the agents across sectors, at equilibrium, in each sector there is underinvestment in both human and physical capital, due to non-contractibility of investments. A second source of inefficiency is related to the self-selection of the agents into the two sectors. It typically induces too many workers to invest in education. Under suitable restrictions on the parameters, the joint effect of the two distortions is that equilibria are characterized by too many people investing too little effort in the high skill sector. We also analyze the welfare properties of equilibria and study the effects of several tax-subsidy policies on the total expected surplus.

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Bibliographic Info

Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 701.

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Date of creation: May 2010
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Handle: RePEc:bol:bodewp:701

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Cited by:
  1. Zabel, Cordula, 2011. "Lone mothers' participation in labor market programs for means-tested benefit recipients in Germany," IAB Discussion Paper 201114, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  2. Mendolicchio, Concetta & Pietra, Tito, 2014. "On the efficiency properties of the Roy's model under asymmetric information," IAB Discussion Paper 201408, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  3. Engelmann, Sabine, 2011. "Trade liberalisation, technical change and skill-specific unemployment," IAB Discussion Paper 201119, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  4. Mendolicchio Concetta & Paolini Dimitri & Pietra Tito, 2012. "Asymmetric Information And Overeducation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-29, October.
  5. Drasch, Katrin, 2011. "Do changing institutional settings matter? : educational attainment and family related employment interruptions in Germany," IAB Discussion Paper 201113, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].

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