Neighbors: A Locational Model Of Human Capital Formation

This paper studies a number of characterizations of human capital acquisition in an overlapping generations context. The young of each generation optimize acquiring human capital based on their effort at study and the amount of human capital that their parents (the members of the old generation who inhabit the same location they do) and their neighbors. Higher average human capital among their parents and neighbors increases the marginal returns to study. The economy is populated by a large number of agents living on a torus, each of whom lives for two periods, has a child (with no sentimental attachment) at the same location they inhabit, and are replaced by a grandchild when they die. Each economy begins with a random assignment of human capital to the old of period one and follows the evolution via computer simulation in the spirit of cellular automata.The first economy has no markets and no mobility of agents (families) Beginning from random allocations of human capital for the first period old, over time this economy becomes one with regions of high human capital (and consumption) and those of low human capital. There is a long term drift in this version to economies with everyone either poor or rich. However, ghettos persist for more than 100 generations.The second economy introduces a student loan market in which those of a generation who live in a low human capital region and who chose to work and not to study (because their personal returns on study are relatively low) can lend to those who live in a high human capital region where the returns on study are much higher. This economy quickly settles into regions of high and low human capital and these regions are remarkable stable over time. Welfare increases for both those who do not study and those who do (because they devote all their time when young to study and rapidly generate regions of very high human capital) relative to the no loan market economy.In the third economy families are endowed with different abilities to acquire human capital (a talent that is randomly allocated). Each period random matchings occur and individuals can trade places with side payments. An individuals with a high talent level can purchase a high human capital location from a person with lower talent level who happens to reside there and who they happen to be matched in the trading period. These individuals change places and their families (who have the same talent levels) continue to reside in the new location. From an initial random allocation of talent levels, high talent individuals gradually migrate to high human capital regions. High human capital areas are stable and individuals in these areas receive incomes that are proportionally very much greater than the differences in talent. The market for locations greatly augments income inequalities.Relatively small shocks to this economy can produce long wave fluctuations in output. Shocks are of the nature of changes in a family's talent level. With only five families encountering changes in their talent level per period (out of a population of 3481 individuals) and each individual having two matches, cycles equal to 2 to 4 percent of output occur. Propagation of cycles occurs because of the change in the talent level (which over time effects the human capital accumulation of neighbors) and the secondary change that occurs when a locational swap is made.