A Simple Economic Theory of Skill Accumulation and Schooling Decisions
31 Pages Posted: 23 Dec 2014
Date Written: December 22, 2014
We propose a model of schooling that can account for the observed heterogeneity in workers’ productivity and educational attainment. Identical unskilled agents can get a degree at a cost, but becoming skilled entails an additional unobservable effort cost. Individual labor can then be used as an input in pairwise production matches. Two factors affect students’ desire to build human capital: degrees imperfectly signal productivity, and contract imperfections generate holdup problems. Multiple stationary equilibria exist, some of which are market failures characterized by a largely educated workforce of low average skill. Policy implications are explored.
Keywords: Education Policy, Education Finance, Human Capital, Informational Frictions, Matching, Multiple Equilibria
JEL Classification: D8, I2, J24
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