On the institutional limits to human capital

Education as an investment has competitive investment assets to which is compared usually by the respective return rates, that crucially depend on institutional quality. High returns to education depend on education quality whereas returns to rent seeking are basically determined by the quality of economic institutions. To analyse the implications of these settings an extension of standard OLG models is designed to allow for rent seeking activities (when institutions are weak) as an alternative to invest in human capital, affecting long term growth. The analysis shows that in the long term the individual welfare maximising behaviour leads to stationary equilibrium where human capital accumulation stops: when rent seeking is present and/or individuals are impatience it is reached a long term equilibrium with lower levels of human capital. Then, the pursuit of individuals’ profits leads in the long term to an impoverished situation to individuals due to output level stagnation; from this, an immediate implication is that reducing incentives to rent seeking by enhancing institutional settings, becomes a close substitute to allocate more resources to education investment in the short term, an a more effective option in the long term.