Investment in Hierarchical Human Capital

Abstract

Advanced human capital requires "basic" human capital as an input. Physical capital does not, in general, have such hierarchical structure. This paper models optimal investment in hierarchical human capital as well as nonhierarchical physical capital. The authors analyze the steady state, transition dynamics, and endogenous growth properties of the system. The optimal program exhibits non-monotonicities in human capital stocks. This result has important implications for the optimal timing of investment in hierarchical human capital. The analysis also addresses the debate regarding the distribution of education expenditures and the divergence between ex-post and ex-ante rates of return to education.

Public Expenditure on Education and Skill Formation: Is There a Simple Rule to Maximize Skills?

“…For this reason, the structure of the system matters because performance at earlier stages affects the output at higher levels; budget allocation rules should take this into account. To analyse this point, hierarchical education models have been used by Driskill & Horowitz (2002), Driskill et al (2009), Su (2004, 2006, as well as Estevan & Verheyden (2010). However, this approach is not commonly used in discussing policy issues in education.…”

“…In this model, contrary to that in Su (2004), an individual's decision to become educated or to enter the labour market is not modelled; instead, the simple model here assumes a particular dropout function that easily captures the elements in an individual's decision to study. Also, unlike the works of Su (2006) and Estevan & Verheyden (2010), which deal with the political economy of budget allocation, which is endogenously determined, the focus here is on the optimal conditions for budget allocation in a steady-state economy, so the growth approach of Driskill & Horowitz (2002) and Driskill et al (2009) is not followed.…”

Public Investment in a Hierarchical Educational System With Capital–skill Complementarity

“…The literature on investment in a hierarchical education system and its implications for growth emerged in 2002 with the pioneering study of Driskill and Horowitz (2002), which was followed by others. Instead of focusing on the optimal magnitude of investment in education, these studies focused on the optimal allocation of investment at different stages of growth.…”

“…On the other hand, previous growth accounting exercises [Gemmell (1995)] argue that in poorer countries basic education contributes to growth more than higher education, whereas in richer countries it is higher education that contributes more to growth. 1 The policy implication of this exercise is that a government of a poorer country should invest more in basic education-rather than in higher education-as Driskill and Horowitz (2002) suggest.…”

Public funding of higher education

“…Particularly, Driskill and Horowitz (2002) study the optimal investment in hierarchical human capital and find that the optimal program exhibits a non-monotonicity in human capital stocks. In Su (2004) the emphasis is on efficiency and income inequality in a hierarchical education system.…”