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Intergenerational interactions in human capital accumulation

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We analyze an economy populated by a sequence of generations who decide over their consumption and investment in human capital of their immediate descendants. The objective of the paper is twofold: firstly, to identify the impact of strategic interactions between consecutive generations on the time path of human capital accumulation. To this end, we characterize the Markov perfect equilibrium (MPE) in such an economy and derive the sufficient conditions for its existence and uniqueness. We then benchmark our results against an optimal but time-inconsistent policy which abstracts from strategic interactions between generations. We prove analytically that human capital accumulation is unambiguously lower in the “strategic” case than in the optimal, “non-strategic” case. The second objective of the current paper is to work out a functional parametrization of the model, suitable for obtaining clear-cut results on the monotonicity of the (unique) Markov perfect equilibrium policy and the optimal policy. We then carry out a sensitivity analysis under this parametrization, thereby assessing quantitatively the magnitude of discrepancies between human capital accumulation paths whether strategic interactions between consecutive generations are taken into account or not.

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Bibliographic Info

Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 71.

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Length: 46
Date of creation: 2010
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Handle: RePEc:nbp:nbpmis:71

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Keywords: human capital; intergenerational interactions; Markov perfect equilibrium; stochastic transition; constructive approach;

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