Human Capital Policies in a Static, Two-Sector Economy with Imperfect Markets

Concetta Mendolicchio, Dimitri Paolini and Tito Pietra

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: The paper studies a two-sector economy with investments in human and physical capital and imperfect labor markets. Workers and firms endogenously select (paying a fixed cost) the sector they are active in, and choose the amount of their investments. The economy is characterized by pecuniary externalities. Given the partition of the agents among the two sectors, at equilibrium there is underinvestment in both human and physical capital, as in Acemoglu (1996). A second externality is induced by the self-selection of the agents in the two sectors. When the difference between total factor productivities (TFP) is sufficiently large, subsidies to investments in education in the low TFP sector and fixed taxes increasing the cost to access the high productivity sector increase expected total surplus, while subsidies to investments in the high TFP sector can actually reduce it. To the contrary, subsidies to the amount of investments in human capital in the high TFP sector may have a positive effect on social welfare when the TFPs are sufficiently close.

Keywords: efficiency; human capital policies; human capital (search for similar items in EconPapers)
JEL-codes: H2 J24 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-hrm and nep-lab
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:200807

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