Role of Human Capital Accumulation in the Adoption of Sustainable Technology: An Overlapping Generations Model with Natural Resource Degradation

Abstract

We develop an economic model to derive the conditions under which individuals will invest in human capital and move on to adopt sustainable technology instead of natural resource-intensive technology. For this purpose, we extend the overlapping generation model developed by Ikefuji & Horii as our analytical framework. Unlike Ikefuji & Horii who developed an overlapping generation model (OLG) in the context of local pollution, the authors adopted it in the context of renewable natural resources. To do this, we have introduced the production sector that relies on natural resource-intensive technology. This research extends beyond the Ikefuji & Horii model by assuming that an individual derives utility by investing in his child’s education apart from utility derived from consumption when young and adult. Human capital accumulation enables individuals to participate in human capital-intensive production, which produces output through sustainable production technology. As the main result of our theoretical analysis, we find that more educated individual is less dependent on the natural resource endowment for earning their income. We also find that sustainable consumption growth requires that individuals assign a certain positive weight to investment in their child’s education. A long-run steady-state equilibrium level of human capital accumulation is higher and higher than the weight assigned by the parents to the child’s education. In this overlapping generation’s economy, sustainable consumption growth requires that individuals assign a certain weight or give some importance to human capital accumulation. This follows from the fact that the long-run steady-state value of the income earned by an individual depends positively on the expenditure on education.