A Multiplicative Model of Investment in Human Capital
The purpose of this paper is to analyze the effects of changes in exogenous parameters such as the interest rate, the length of the working period and initial endowments on the shape of the observed earnings profile. Though this problem can be treated in general, we shall restrict ourselves to the following "inverse optimal" problem: find a form of the trade-off function between current and future earnings which leads to a logarithmic earnings function. In the paper we demonstrate that logarithmic earning functions can be derived from optimal behavior. Specifically, the simple case which we analyze leads to piece wise linear log earnings functions. Such a derivation has the advantage that the effects on earnings of exogenous factors can be consistently analyzed. The model is sufficiently simple to allow a clear exposition of the basic elements which govern earnings in a static world. The same elements appear in the more complicated derivations currently available in the literature but it is more difficult to trace their impact. The multiplicative model provides additional information on the robustness of the results previously derived from the Ben-Porath specification. This is particularly important since the "production function" for human capital is not directly observable and alternative specification can only be compared in terms of their implications with respect to observed earnings.
|Date of creation:||Jun 1976|
|Publication status:||published as (Published as "The Effect of Risk on the Investment in Human Capital") American Economic Review, Vol. 64, no. 5 (1974): 950-963.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Lee A. Lillard, 1973. "Human Capital Life Cycle of Earnings Models: A Specific Solution and Estimation," NBER Working Papers 0004, National Bureau of Economic Research, Inc.
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- Haley, William J, 1973. "Human Capital: The Choice Between Investment and Income," American Economic Review, American Economic Association, vol. 63(5), pages 929-944, December.
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- Brown, Charles, 1976. "A Model of Optimal Human-Capital Accumulation and the Wages of Young High School Graduates," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 299-316, April. Full references (including those not matched with items on IDEAS)
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