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Investment in Human Capital in a Macrodynamic Framework: Redistributive Taxation, Public Debt and Welfare

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Leandro Gonçalves do Nascimento

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Abstract

Efficient investment in human capital is a subject of great concern among economists. By means of an overlapping-generations macrodynamic model with credit constraints, imperfect insurance and exogenous labor supply, we appraise inefficiencies related to misinvestment in human capital and propose a simple scheme of redistributive taxation to mitigate them. A numerical simulation is calibrated in order to match stylized facts of the quite unequal Brazilian economy and shows that, in steady-state, with a flat-tax mechanism and lump-sum transfers, government intervention is beneficial to the extent it maximizes our utilitarian measure of welfare and reduces both inefficiency associated with misdirected investment in human capital and standard inequality indexes. After considering the possibility of decomposing our utilitarian measure of welfare and of allowing for public debt, we show that reduced inequality is the driving force which accounts for welfare improvement and that public debt plays no role. Robustness analysis shows that endogenizing labor supply does not lead to substantial changes in previous results

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 539.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:539

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Keywords: investment in human capital idiosyncratic risk efficiency overaccumulation of capital redistributive taxation public debt welfare measures social insurance.

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Find related papers by JEL classification:
D1 - Microeconomics - - Household Behavior
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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  1. Aiyagari, S. Rao & Greenwood, Jeremy & Seshadri, Ananth, 2002. "Efficient Investment in Children," Journal of Economic Theory, Elsevier, vol. 102(2), pages 290-321, February. [Downloadable!] (restricted)
    Other versions:
  2. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Gomes, Joao F & Greenwood, Jeremy & Rebelo, Sérgio, 1997. "Equilibrium Unemployment," CEPR Discussion Papers 1602, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359. [Downloadable!] (restricted)
  5. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June. [Downloadable!] (restricted)
  6. Pedro Cavalcanti Gomes Ferreira & Paulo Rogério da Costa Val, 2002. "Modelos de Ciclos Reais de Negócios Aplicados à Economis Brasileira," Economics Working Papers (Ensaios Economicos da EPGE) 438, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  7. Floden, Martin, 2001. "The effectiveness of government debt and transfers as insurance," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 81-108, August. [Downloadable!] (restricted)
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  8. Cunha, Bárbara Vasconcelos Boavista da & Ferreira, Pedro Cavalcanti Gomes, 2003. "Custo de Ciclo Econômico no Brasil em um Modelo com Restrição a Crédito," Economics Working Papers (Ensaios Economicos da EPGE) 471, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  9. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August. [Downloadable!] (restricted)
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