Optimal Allocation of Physical and Skills Capital in Services Production

Gupta, Abhay (2007): Optimal Allocation of Physical and Skills Capital in Services Production.

Abstract

”Software/ Skills” capital differs from usual physical capital (or hard- ware) in the sense that it is non-rival and can be replicated at a cost (e.g. patent fee or training costs). A basic model of production is developed which involves production sector and training or replication sector (which produces skills). Using a 2 period production model, the paper finds that in sectors where the objective is output maximization (e.g. government services or health care) - There exists an optimal ratio of investment in physical capital and in- vestment in skills-capital depending on the state of technology and already existing stocks. In a capital-rich economy, a higher proportion of skills is allocated to pro- duction sector and a higher proportion of investment is allocated to training sector compared to capital-scarce economy . During high-investment periods, a higher share of investment goes to physical capital while a lower share of skills goes into production sector (compared to low-investment period). Initial stock of skills, does not have any affect on these allocation-ratios.

• Item Type: MPRA Paper
• Language: English
• Subjects: L - Industrial Organization > L8 - Industry Studies: Services; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E23 - Production; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity

References

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