Personal Increasing Returns: Analytics and Applications

Abstract

The human capital investment model with endogenous labor supply is generalized to consumer and health behaviors while retaining the tractability of comparative-static analysis of a single first-order condition. Accounting for the endogenous specialization responses is essential to properly distinguish supply and demand factors and to understand how the magnitude of their effects vary across time and circumstances. Even signing effects of policy interventions can hinge on the existence and extent of personal increasing returns. Applications include the gender gap in earnings, the dynamics of substance abuse, effects of taxes on human capital, the tradeoff between product quality and quantity, and unintended consequences of energy regulation. Metrics are provided for assessing the extent of personal increasing returns.