A Model of Capital Allocation, Education and Job Choice in China

The Chinese Economy, Vol. 29, No. 5, p. 307-326, 2016

21 Pages Posted: 27 Jul 2015 Last revised: 7 May 2017

See all articles by Jaimie W. Lien

Jaimie W. Lien

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics

Wei Wang

Tsinghua University, School of Economics & Management

Jie Zheng

Tsinghua University - School of Economics & Management

Date Written: March 29, 2015

Abstract

The narrowing wage gap between high and low skilled workers in the Chinese labor market in recent years is suggestive of government interventions which may have been implemented in the capital markets. We develop a game theoretic model between a continuum of heterogeneous workers and the government, where workers choose education levels, the government chooses its capital allocation strategy subject to a budget constraint, and the workers then make employment choices. The government is modeled as having a possible policy priority on particular industries or sectors. We characterize the existence and uniqueness conditions for equilibrium of the game, and provide a closed form solution to the model for reasonable parameter values. We show that the wage ratio between high and low skilled workers decreases as government’s policy priority (or bias) towards low-skilled sectors increases, up to a threshold level of the policy bias. Beyond that threshold level, the wage gap between high and low skill workers is negative. Thus the shrinking wage gap can be explained by the government’s capital investment strategy which is driven by its policy priority bias. We derive comparative statics results and discuss policy implications.

Keywords: capital misallocation, job choice, education, government investment, wage gap, policy bias, China

JEL Classification: C72, I25, I28, H54

Suggested Citation

Lien, Jaimie W. and Wang, Wei and Zheng, Jie, A Model of Capital Allocation, Education and Job Choice in China (March 29, 2015). The Chinese Economy, Vol. 29, No. 5, p. 307-326, 2016, Available at SSRN: https://ssrn.com/abstract=2636097

Jaimie W. Lien (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics ( email )

Shatin, N.T.
Hong Kong

Wei Wang

Tsinghua University, School of Economics & Management ( email )

Beijing
China

Jie Zheng

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

HOME PAGE: http://jzheng.weebly.com/

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