The Low-Skill, Low-Quality Trap: Strategic Complementarities between Human Capital and R&D

Stephen Redding

Economic Journal, 1996, vol. 106, issue 435, 458-70

Abstract: This paper investigates the relationship between investments in human capital and R&D in a model of endogenous growth. Both forms of investment exhibit pecuniary externalities and are, as a result, strategic complements. Multiple equilibria may occur for intermediate parameter values and the present analysis may be seen as providing a theoretical rationalization for the idea that an economy may become trapped in a 'low-skills' equilibrium, characterized by a poorly trained workforce and low product quality. In the presence of multiple equilibria, there may be a welfare-improving role for government policy in coordinating expectations. Copyright 1996 by Royal Economic Society.

Date: 1996
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