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Competition, Human Capital and Income Inequality with Limited Commitment

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Author Info
Ramon Marimon
Vincenzo Quadrini
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.

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Paper provided by European University Institute in its series Economics Working Papers with number ECO2008/21.

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Date of creation: 2008
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Handle: RePEc:eui:euiwps:eco2008/21

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Related research
Keywords: Limited commitment; limited enforcement; human capital accumulation; income inequality; innovation; barriers to competition.;

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Find related papers by JEL classification:
D99 - Microeconomics - - Intertemporal Choice and Growth - - - Other
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
O34 - Economic Development, Technological Change, and Growth - - Technological Change - - - Intellectual Property Rights
O43 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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  5. Anton, James J & Yao, Dennis A, 1994. "Expropriation and Inventions: Appropriable Rents in the Absence of Property Rights," American Economic Review, American Economic Association, vol. 84(1), pages 190-209, March. [Downloadable!] (restricted)
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  9. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, January.
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