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Human Capital Policies in a Static, Two-Sector Economy with Imperfect Markets

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  • C. Mendolicchio
  • D. Paolini

    ()

  • T. Pietra

Abstract

The paper studies a two-sector economy with investments in human and physical capital and imperfect labor markets. Workers and firms endogenously select (paying a fixed cost) the sector they are active in, and choose the amount of their investments. The economy is characterized by pecuniary externalities. Given the partition of the agents among the two sectors, at equilibrium there is underinvestment in both human and physical capital, as in Acemoglu (1996). A second externality is induced by the self-selection of the agents in the two sectors. When the difference between total factor productivities (TFP) is sufficiently large, subsidies to investments in education in the low TFP sector and fixed taxes increasing the cost to access the high productivity sector increase expected total surplus, while subsidies to investments in the high TFP sector can actually reduce it. To the contrary, subsidies to the amount of investments in human capital in the high TFP sector may have a positive effect on social welfare when the TFPs are sufficiently close.

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Bibliographic Info

Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 200807.

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Date of creation: 2008
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Handle: RePEc:cns:cnscwp:200807

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Keywords: human capital; efficiency; human capital policies;

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Cited by:
  1. MENDOLICCHIO, Concetta & PAOLINI, Dimitri & PIETRA, Tito, . "Investments in education and welfare in a two-sector, random matching economy," CORE Discussion Papers RP -2501, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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