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Physical And Human Capital Investment: Relative Substitutes In The Endogenous Growth Process

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  • Jorge Durán

    ()
    (Universidad de Alicante)

  • Alexandra Rillaers

    ()
    (Universidad de Alicante)

Abstract

This paper aims at studying the interaction between growth of real output and human capital accumulation when education requires investment of physical resources. To this end we investigate the aggregate implications of individual specific uncertainty about returns to investment in education in the absence of insurance markets. We do so in a general equilibrium OLG model in which physical resources must be devoted to education in order to accumulate human capital. We find that uncertainty with incomplete financial markets may strongly affect individual behavior but not the aggregate of the economy: different degrees of uncertainty will induce different intensities of human to physical capital but will not have a significant impact on the long run growth rate of the economy. This framework allows us to conclude that investing less in education in relative terms does not necessarily lead to less growth: the accumulation of physical and human capital display some degree of substitutability as an engine for long run growth.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2002-18.pdf
File Function: Fisrt version / Primera version, 2002
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Bibliographic Info

Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2002-18.

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Length: 32 pages
Date of creation: Oct 2002
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2002-18

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Related research

Keywords: Overlapping generations; Investment in education; Uninsured shocks; Human capital; Sustained growth.;

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References

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  1. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, vol. 64(6), pages 950-63, December.
  2. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9.
  3. Williams, Joseph T, 1978. "Risk, Human Capital, and the Investor's Portfolio," The Journal of Business, University of Chicago Press, vol. 51(1), pages 65-89, January.
  4. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  5. Williams, Joseph T, 1979. "Uncertainty and the Accumulation of Human Capital over the Life Cycle," The Journal of Business, University of Chicago Press, vol. 52(4), pages 521-48, October.
  6. Aghion, Philippe & Bolton, Patrick, 1992. "Distribution and growth in models of imperfect capital markets," European Economic Review, Elsevier, vol. 36(2-3), pages 603-611, April.
  7. Gary S. Becker, 1975. "Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, 2nd ed," NBER Books, National Bureau of Economic Research, Inc, number beck75-1, July.
  8. Kodde, David A, 1986. "Uncertainty and the Demand for Education," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 460-67, August.
  9. Theodore W. Schultz, 1960. "Capital Formation by Education," Journal of Political Economy, University of Chicago Press, vol. 68, pages 571.
  10. Altonji, Joseph G & Dunn, Thomas A, 1996. "The Effects of Family Characteristics on the Return to Education," The Review of Economics and Statistics, MIT Press, vol. 78(4), pages 692-704, November.
  11. Kodde, David A. & Ritzen, Josef M.M., 1985. "The demand for education under capital market imperfections," European Economic Review, Elsevier, vol. 28(3), pages 347-362, August.
  12. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  13. Snow, Arthur & Warren, Ronald S, Jr, 1990. "Human Capital Investment and Labor Supply under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 195-206, February.
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