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Market and Public Provision in the Presence of Human Capital Externalities

  • De Fraja, Gianni

This paper suggests that human capital externalities are important in determining whether goods and services should be privately or publicly provided. We study situations where that the cost incurred by an individual provider for providing quality is affected by the human capital of her colleagues. This is the case for goods such as health, education, legal services, police protection, and so on. The mode of provision (private or public) affects a supplier’s incentive to acquire human capital and therefore her colleagues’ cost of provision. The paper shows that either mode of provision may be preferable, depending on the nature of the human capital externality: private provision of the final goods and services provides stronger incentives to human capital acquisition (and may therefore be socially preferable) if own human capital and one’s colleagues’ human capital are substitutes, and suppliers with high human capital benefit more benefit more than suppliers with low human capital from their colleagues’ human capital, but not excessively so.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5471.

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Date of creation: Jan 2006
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Handle: RePEc:cpr:ceprdp:5471
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  1. Sala-i-Martin, Xavier X, 1996. " A Positive Theory of Social Security," Journal of Economic Growth, Springer, vol. 1(2), pages 2a77-304, June.
  2. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
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  4. Bennett, John & Elisabetta Iossa, 2002. "Building and Managing Facilities for Public Services," Royal Economic Society Annual Conference 2002 22, Royal Economic Society.
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  6. Richard Arnott & John Rowse, 1982. "Peer Group Effects and Educational Attainment," Working Papers 497, Queen's University, Department of Economics.
  7. Andrei Shleifer, 1998. "State Versus Private Ownership," Harvard Institute of Economic Research Working Papers 1841, Harvard - Institute of Economic Research.
  8. Glomm, Gerhard & Lagunoff, Roger, 1999. "A Dynamic Tiebout Theory of Voluntary vs. Involuntary Provision of Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 659-77, July.
  9. Oliver Hart & Andrei Shleifer & Robert Vishny, 1996. "The Proper Scope of Government: Theory and an Application to Prisons," Harvard Institute of Economic Research Working Papers 1778, Harvard - Institute of Economic Research.
  10. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  11. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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