In a two period overlapping generations economy with asymmetric information, we investigate the interaction between credit market development and human capital accumulation. As is typical, young borrowers supply their endowed unit of labor time to earn wage income which is used as internal funds. In contrast to conventional setups, young lenders distribute theirs between acquiring education and working for earnings. Through identifying the risk types of borrowers by a costly screening technology, a self selection equilibrium is achieved. We find that, at steady state, lenders will allocate more time to acquire education if the cost of screening borrowers falls. Furthermore, a longer duration of lenders' schooling time suppresses borrowers' incentive to cheat thereby enabling lenders to screen less frequently. These results suggest the possibility of a mutual beneficial interplay between credit market development and human capital accumulation. At last, our comparative static analysis show that improvements on borrowers' investment technology promote human capital accumulation but that on lenders' does the opposite.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
16760.
Find related papers by JEL classification: O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
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Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004.
"Do Institutions Cause Growth?,"
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Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2004.
"Do Institutions Cause Growth?,"
NBER Working Papers
10568, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Tsiddon, Daniel, 1992.
"A Moral Hazard Trap to Growth,"
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Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 299-321, May.
[Downloadable!] (restricted)