Abstract
This paper develops an overlapping generations model with heterogeneous (skilled versus unskilled) agents to analyze skill choice and dynamic efficiency of the steady-state equilibrium. Those adults sacrificing working time for skill training become skilled workers, while those adults not receiving skill training are referred to as unskilled workers. Findings show when there is no government intervention that the steady-state equilibrium is dynamically efficient, and that the ratio of skilled workers to the adult population is lower than it would be under the Golden rule if the depreciation rate of capital is sufficiently low. An elaborate policy to subsidize the costs of skill acquisition can thus be initiated to help the economy choose the right mix of skills while at the same time maintaining the dynamic efficiency of the steady-state equilibrium.
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