Cross-country income dispersion, human capital, and technology adoption

Countries with high levels of human capital also tend to be technologically advanced. We study whether modeling technology adoption can significantly amplify the importance of human capital differences in accounting for cross-country income gaps. We document that schooling is positively and robustly correlated with measures of technology adoption and usage, and negatively correlated with the prevalence of traditional forms of production, where technology adoption is limited, and productivity is lower. Motivated by this, we build a general equilibrium model with human capital investment, endogenous occupational choices, and technology adoption. Production takes place either in a traditional sector, where technology adoption is absent, or in a modern sector, where managers hire a workforce and optimally choose technology. Economies differ in terms of schooling levels by occupation and in the size of barriers to technology adoption. These differences, working together, result in a factor of 6 between US income and that of the bottom quartile of countries. Schooling differences on their own result in a factor of 3.5, compared to a factor of 2 in a one-sector version of the model where technology choices are absent.