Intergenerational interactions in human capital accumulation

Woźny, Łukasz and Growiec, Jakub (2008): Intergenerational interactions in human capital accumulation.

Abstract

We analyze an economy populated by a sequence of generations who decide over their consumption levels and the levels of investment in human capital of their immediate descendants. The objective of the paper is to identify the impact of strategic interactions between consecutive generations on the time path of human capital accumulation. To this end, we characterize the Markov perfect equilibrium (MPE) in such an economy and derive the sufficient conditions for its existence and uniqueness. The equilibrium path is computed using a novel constructive approach: extending Reffett and Woźny (2008), we put forward an iterative procedure which converges to the MPE as its limit.

To benchmark our results, we also calculate the optimal human capital accumulation paths for (i) a Ramsey-type model with dynastic optimization, and (ii) a model with joy-of-giving altruism. We prove analytically that human capital accumulation is unambiguously lower in the "strategic" model than in the Ramsey-type dynastic model. We complement our results with a series of numerical exercises.

• Item Type: MPRA Paper
• Language: English
• Keywords: human capital; intergenerational interactions; Markov perfect equilibrium; stochastic transition; constructive approach
• Subjects: I - Health, Education, and Welfare > I2 - Education and Research Institutions > I20 - General; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J22 - Time Allocation and Labor Supply; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games

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