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Human capital misallocation, redistributive policies, and TFP

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  • Bandyopadhyay, Debasis
  • King, Ian
  • Tang, Xueli

Abstract

We analyse the impact of human capital misallocation and redistribution on GDP, welfare, and TFP, in economies with financial market imperfections. We present an overlapping generations model in which the innate abilities of children are drawn from a probability distribution and where parents are unable to insure against these shocks or borrow against their child’s future incomes. The government has access to a redistributive tax and transfer system that can partially mitigate the effects of these missing markets. The steady state equilibrium of the model features closed form analytical solutions for the distributions of human capital, physical capital, and income, along with aggregate measures of TFP and welfare. We calibrate the model to the US economy and find that the misallocation, and its adverse effects on TFP and GDP, can be significant. However redistributive policies, aimed at mitigating the misallocation from these missing markets, have only small positive effects on TFP but large negative effects on GDP.

Suggested Citation

  • Bandyopadhyay, Debasis & King, Ian & Tang, Xueli, 2019. "Human capital misallocation, redistributive policies, and TFP," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 309-324.
    • Handle: RePEc:eee:jmacro:v:60:y:2019:i:c:p:309-324
    DOI: 10.1016/j.jmacro.2019.02.005
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    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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