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Market and Public Provision in the Presence of Human Capital Externalities

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  • De Fraja, Gianni

Abstract

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.

Suggested Citation

  • De Fraja, Gianni, 2006. "Market and Public Provision in the Presence of Human Capital Externalities," CEPR Discussion Papers 5471, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5471
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
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    4. Arnott, Richard & Rowse, John, 1987. "Peer group effects and educational attainment," Journal of Public Economics, Elsevier, vol. 32(3), pages 287-305, April.
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    6. Andrei Shleifer, 1998. "State versus Private Ownership," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 133-150, Fall.
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    10. repec:hrv:faseco:30727607 is not listed on IDEAS
    11. Gerhard Glomm & Roger Lagunoff, 1999. "A Dynamic Tiebout Theory of Voluntary vs. Involuntary Provision of Public Goods," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 659-677.
    12. 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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    Cited by:

    1. Blomquist Glenn C. & Troske Kenneth R. & Coomes Paul A. & Jepsen Christopher & Koford Brandon C., 2014. "Estimating the social value of higher education: willingness to pay for community and technical colleges," Journal of Benefit-Cost Analysis, De Gruyter, vol. 5(1), pages 1-39, January.
    2. repec:eee:ecmode:v:64:y:2017:i:c:p:539-552 is not listed on IDEAS

    More about this item

    Keywords

    education; health; human capital externality; public provision of private goods; public-private partnership; training;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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