Constrained Efficiency in a Human Capital Model

Abstract

This paper investigates whether capital and human capital are over-accumulated in an incomplete market economy. As in Dávila et al. (2012), whether capital is over-accumulated depends on how the pecuniary externalities affect insurance and redistribution. In a human capital economy, however, not only capital but also human capital generates externalities and an additional channel arises that has implications for the overaccumulation (under-accumulation) of capital (human capital). The income sources of the poor and the correlation between wealth and human capital are crucial for the implication of pecuniary externalities. Realistically calibrated models exhibit under-accumulation (overaccumulation) of capital (human capital). (JEL D52, D62, I26, J22, J24, J31)