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Human capital misallocation, redistributive policies, and TFP

Debasis Bandyopadhyay, Ian King and Xueli Tang

Journal of Macroeconomics, 2019, vol. 60, issue C, 309-324

Abstract: We analyse the impact of human capital misallocation and redistribution on GDP, welfare, and TFP, in economies with financial market imperfections. We present an overlapping generations model in which the innate abilities of children are drawn from a probability distribution and where parents are unable to insure against these shocks or borrow against their child’s future incomes. The government has access to a redistributive tax and transfer system that can partially mitigate the effects of these missing markets. The steady state equilibrium of the model features closed form analytical solutions for the distributions of human capital, physical capital, and income, along with aggregate measures of TFP and welfare. We calibrate the model to the US economy and find that the misallocation, and its adverse effects on TFP and GDP, can be significant. However redistributive policies, aimed at mitigating the misallocation from these missing markets, have only small positive effects on TFP but large negative effects on GDP.

Keywords: Heterogeneous agents; Misallocation; TFP; Redistribution (search for similar items in EconPapers)
JEL-codes: E13 E25 E62 O11 O41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (9)

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DOI: 10.1016/j.jmacro.2019.02.005

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Handle: RePEc:eee:jmacro:v:60:y:2019:i:c:p:309-324