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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

    ()
    (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM))

  • Karine Gente

    ()
    (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM))

  • Carine Nourry

    ()
    (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM), IUF - Institut Universitaire de France - Ministère de l'Enseignement Supérieur et de la Recherche Scientifique)

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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Paper provided by HAL in its series Working Papers with number halshs-00822391.

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Date of creation: May 2013
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Handle: RePEc:hal:wpaper:halshs-00822391

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Keywords: endogenous growth; social optimum; two-sector model; factor intensity differential;

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  1. Eric W. Bond & Ping Wang & Chong K. Yip, 1993. "A general two-sector model of endogenous growth with human and physical capital: balanced growth and transitional dynamics," Research Paper, Federal Reserve Bank of Dallas 9324, Federal Reserve Bank of Dallas.
  2. Akos Valentinyi & Berthold Herrendorf, 2008. "Measuring Factor Income Shares at the Sectoral Level," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 0803, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  3. Boldrin, Michele & Montes, Ana, 2002. "The Intergenerational State: Education and Pensions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3275, C.E.P.R. Discussion Papers.
  4. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," NBER Working Papers 13290, National Bureau of Economic Research, Inc.
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  6. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, Econometric Society, vol. 60(6), pages 1351-86, November.
  7. Docquier, Frederic & Paddison, Oliver & Pestieau, Pierre, 2007. "Optimal accumulation in an endogenous growth setting with human capital," Journal of Economic Theory, Elsevier, Elsevier, vol. 134(1), pages 361-378, May.
  8. 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, Cambridge University Press, vol. 16(S1), pages 103-116, April.
  9. 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).
  10. Marion Davin & Karine Gente & Carine Nourry, 2011. "Social Optimum in an OLG Model with Paternalistic Altruism," Working Papers halshs-00644094, HAL.
  11. Cremers, Emily T., 2006. "Dynamic efficiency in the two-sector overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(11), pages 1915-1936, November.
  12. Zuleta, Hernando & Young, Andrew T., 2013. "Labor shares in a model of induced innovation," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 24(C), pages 112-122.
  13. David Evans & Haluk Sezer, 2004. "Social discount rates for six major countries," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 11(9), pages 557-560.
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