Human capital and welfare Human capital and welfare

Stefano Bosi (1) , Carmen Camacho (2, 3) , David Desmarchelier (4)

1 EPEE - Centre d'Etudes des Politiques Economiques
2 PJSE - Paris Jourdan Sciences Economiques
3 PSE - Paris School of Economics
4 BETA - Bureau d'Économie Théorique et Appliquée

We consider a growth model à la Lucas (1988), where human capital has an additional positive effect on social welfare through the quality of individual health and education. Considering a simple example with isoe-lastic technology and preferences, we show that, differently from Lucas' contribution, the BGP is optimal only in the specific case in which consumption and human capital have equal weight in total utility. In general, the BGP fails to be optimal. Indeed, when the weight of consumption exceeds that of human capital, the household chooses to spend all her time working from a critical date on. As a result, if individuals do not appreciate enough human capital, then they fix a ceiling level of human capital. On the contrary, the working time decreases to zero when the weight of human capital exceeds that of consumption. On methodologi-cal ground, very interestingly, we obtain a strictly positive transversality condition. Furthermore, we compute the explicit optimal trajectories for human capital, labor supply and consumption demand.

Keywords: transversality condi- tion; unbalanced growth; transversality condition Keywords: human capital; human capital

Domains: Economics and Finance

Stefano Bosi, Carmen Camacho, David Desmarchelier. Human capital and welfare Human capital and welfare. 2020. ⟨halshs-03920429v1⟩