Additional information is available for the following registered author(s):

• Dimitri Paolini
• Tito Pietra

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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Publisher 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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Related research

Keywords: Human capital; Efficiency; Human capital policies;

Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

This paper has been announced in the following NEP Reports:

• NEP-ALL-2008-07-14 (All new papers)
• NEP-HRM-2008-07-14 (Human Capital & Human Resource Management)
• NEP-LAB-2008-07-14 (Labour Economics)

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This page was last updated on 2009-11-27.