Heterogeneous human capital, inequality and growth: The role of patience and skills

• Published in: International journal of economic theory Vol. 16; no. 4; pp. 399 - 419
• Main Authors: Borissov, Kirill, Bosi, Stefano, Ha‐Huy, Thai, Modesto, Leonor
• Format: Journal Article
• Language: English
• Published: Oxford Wiley Subscription Services, Inc 01-12-2020
• Subjects: Accumulation; Agents; Capital distributions; Capital formation; Human capital; Inequality; Meritocracy; Redistribution; sep heterogenous patience and skill; sep inequality and growth; Social welfare
• ISSN: 1742-7355; 1742-7363
• DOI: 10.1111/ijet.12200

We extend the Lucas (1988) model, introducing two classes of agents with heterogeneous skills, discount factors and initial human capital endowments. We consider two regimes according to the planner's political constraints. In the meritocratic regime, the planner faces individual constraints. In the redistributive regime, the planner faces an aggregate constraint. We find that heterogeneity matters, particularly with redistribution. In the meritocratic regime, the optimal solution coincides with the balanced growth path (BGP) found by Lucas (1988) for the representative agent's case. In contrast, in the case of redistribution, the solution for time devoted to capital accumulation is never interior for both agents. Either the less talented agents do not accumulate human capital or the more skilled agents do not work. Moreover, social welfare under the redistributive regime is always higher than under meritocracy, and it is optimal to exploit existing differences. Finally, we find that inequality in human capital distribution increases in time and that, in the long run, inequality always promotes growth.