Competition, Human Capital and Income Inequality with Limited Commitment

Ramon Marimon and Vincenzo Quadrini

No ECO2008/21, Economics Working Papers from European University Institute

Abstract: 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.

Keywords: Limited commitment; limited enforcement; human capital accumulation; income inequality; innovation; barriers to competition. (search for similar items in EconPapers)
JEL-codes: D99 E20 J24 O15 O34 O43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-dev, nep-dge, nep-edu, nep-knm and nep-mac
Date: 2008
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