Human Capital Markets

In many low- and middle-income countries, consumers access education and health services in environments characterized by substantial provider choice. In these settings, a dense landscape of fee-charging private providers has emerged, often located near public facilities and competing for the same clientele. We refer to these environments as human capital markets. This chapter begins by documenting that such markets are now pervasive. We present empirical evidence that human capital markets share many features with conventional product markets: households choose among a wide range of public and private providers with heterogeneous attributes, and providers respond strategically to policy interventions and competitive pressures. We then assess the extent to which canonical models from industrial organization can account for observed behavior, highlighting both their insights and their limitations. Next, we examine the key ways in which human capital markets depart from standard product-market benchmarks—most notably that education and health are both consumption goods and investments, and that quality is often difficult to observe—and review empirical and conceptual approaches developed to address these features. We conclude by outlining the major unresolved questions and promising directions for future research.