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Competition, human capital and income inequality with limited commitment

  • Marimon, Ramon
  • Quadrini, Vincenzo
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    We develop a dynamic model with two-sided limited commitment to study how barriers to competition, such as restrictions to business start-up and non-competitive covenants, affect the incentive to accumulate human capital. When contracts are not enforceable, high barriers lower the outside value of 'skilled workers' and reduce the incentive to accumulate human capital. In contrast, low barriers can result in over-accumulation of human capital. This can be socially optimal if there are positive spillovers. A calibration exercise shows that this mechanism can account for a sizable portion of cross-country income inequality.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0022053111000123
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    Article provided by Elsevier in its journal Journal of Economic Theory.

    Volume (Year): 146 (2011)
    Issue (Month): 3 (May)
    Pages: 976-1008

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    Handle: RePEc:eee:jetheo:v:146:y:2011:i:3:p:976-1008
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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    2. Zilibotti, Fabrizio & Aghion, Philippe & Acemoglu, Daron, 2006. "Distance to Frontier, Selection, and Economic Growth," Scholarly Articles 4554122, Harvard University Department of Economics.
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    8. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1131-1175, August.
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