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Heterogeneous Human Capital, Inequality and Growth: The Role of Patience and Skills

Listed author(s):
  • Kirill Borissov
  • Stefano Bosi
  • Thai Ha-Huy
  • Leonor Modesto

We extend the Lucas' 1988 model introducing two classes of agents with heterogeneous skills, discount factors and initial human capital endowments. We consider two regimes according to the planner's political constraints. In the meritocratic regime, the planner faces individual constraints. In the redistributive regime, the planner faces an aggregate constraint. We find that heterogeneity matters, particularly with redistribution. In the meritocratic regime, the optimal solution coincides with the BGP found by Lucas (1988) for the representative agent's case. In contrast, in the redistribution case, the solution for time devoted to capital accumulation is never interior for both agents. Either the less talented agents do not accumulate human capital or the more skilled agents do not work. Moreover, social welfare under the redistribution regime is always higher than under meritocracy and it is optimal to exploit existing differences. Finally, we find that inequality in human capital distribution increases in time and that, in the long run, inequality always promotes growth.

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Paper provided by European University at St. Petersburg, Department of Economics in its series EUSP Department of Economics Working Paper Series with number 2017/03.

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Length: 54 pages
Date of creation: 23 Jun 2017
Handle: RePEc:eus:wpaper:ec2017_03
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