Credit Market Development and Human Capital Accumulation

Ho, Wai-Hong (2008): Credit Market Development and Human Capital Accumulation.

Abstract

In a two period overlapping generations economy with asymmetric information, we investigate the interaction between credit market development and human capital accumulation. As is typical, young borrowers supply their endowed unit of labor time to earn wage income which is used as internal funds. In contrast to conventional setups, young lenders distribute theirs between acquiring education and working for earnings. Through identifying the risk types of borrowers by a costly screening technology, a self selection equilibrium is achieved. We find that, at steady state, lenders will allocate more time to acquire education if the cost of screening borrowers falls. Furthermore, a longer duration of lenders' schooling time suppresses borrowers' incentive to cheat thereby enabling lenders to screen less frequently. These results suggest the possibility of a mutual beneficial interplay between credit market development and human capital accumulation. At last, our comparative static analysis show that improvements on borrowers' investment technology promote human capital accumulation but that on lenders' does the opposite.

• Item Type: MPRA Paper
• Language: English
• Keywords: Asymmetric information, Human capital
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity

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