Date: 2008
Type: Working Paper
Competition, Human Capital and Income Inequality with Limited Commitment
Working Paper, EUI MWP, 2008/19
MARIMON, Ramon, QUADRINI, Vincenzo, Competition, Human Capital and Income Inequality with Limited Commitment, EUI MWP, 2008/19 - https://hdl.handle.net/1814/8712
Retrieved from Cadmus, EUI Research Repository
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.
Cadmus permanent link: https://hdl.handle.net/1814/8712
ISSN: 1830-7728
Series/Number: EUI MWP; 2008/19
Publisher: European University Institute