Missing Markets for Human Capital and Differences in Growth
There are some empirical facts that growth models usually cannot explain: i) the di.erences in consumption growth rates across countries when international capital markets are considered, ii) the low growth and low levels of education in developing countries where the return on education is very high. This paper introduces a generational structure that implies that the return on human capital is higher than the return on physical capital and that consumption growth rates vary across countries when international capital markets are included. The human capital technology of the paper implies that poor countries grow more slowly and invest a smaller share of income on education, in spite of an extraordinarily high return on education and the existence of international capital markets.
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