Optimal Allocation of Physical and Skills Capital in Services Production

16 Pages Posted: 16 Jun 2008

See all articles by Abhay Gupta

Abhay Gupta

University of British Columbia (UBC); Empirical Foresights

Date Written: January 1, 2007

Abstract

Software/ Skills capital differs from usual physical capital (or hardware) in the sense that it is non-rival and can be replicated at a cost (e.g. patent fee or training costs). A basic model of production is developed which involves production sector and training or replication sector (which produces skills). Using a 2 period production model, the paper finds that in sectors where the objective is output maximization (e.g. government services or health care). There exists an optimal ratio of investment in physical capital and investment in skills-capital depending on the state of technology and already existing stocks. In a capital-rich economy, a higher proportion of skills is allocated to pro- duction sector and a higher proportion of investment is allocated to training sector compared to capital-scarce economy . During high-investment periods, a higher share of investment goes to physical capital while a lower share of skills goes into production sector (compared to low-investment period). Initial stock of skills, does not have any affect on these allocation-ratios.

JEL Classification: L8, E23, J24, D24

Suggested Citation

Gupta, Abhay, Optimal Allocation of Physical and Skills Capital in Services Production (January 1, 2007). Available at SSRN: https://ssrn.com/abstract=1145826 or http://dx.doi.org/10.2139/ssrn.1145826

Abhay Gupta (Contact Author)

University of British Columbia (UBC) ( email )

2329 West Mall
Vancouver, British Columbia BC V6T 1Z4
Canada

Empirical Foresights ( email )

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Vancouver, BC
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