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Competition, Human Capital and Income Inequality with Limited Commitment

  • Ramon Marimon
  • Vincenzo Quadrini
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    We develop a dynamic general equilibrium model with two-sided limited commitment to study how barriers to competition, such as restrictions to business start-up, affect the incentive to accumulate human capital. We show that a lack of contract enforceability amplifies the effect of barriers to competition on human capital accumulation. High barriers reduce the incentive to accumulate human capital by lowering the outside value of ‘skilled workers’, while low barriers can result in over-accumulation of human capital. This over-accumulation can be socially optimal if there are positive knowledge spillovers. A calibration exercise shows that this mechanism can account for significant cross-country income inequality.

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    Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/21.

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    Date of creation: 2008
    Date of revision:
    Handle: RePEc:eui:euiwps:eco2008/21
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