Should a Country Invest more in Human or Physical Capital? A Two-Sector Endogenous Growth Approach

Marion Davin (1) , Karine Gente (1) , Carine Nourry (1, 2)

1 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille
2 IUF - Institut universitaire de France

Should a country invest more in human or physical capital? The present paper addresses this issue, considering the impact of different factor intensities between sectors on both optimal human and physical capital accumulation. Using a two-sector overlapping generations setting with endogenous growth driven by human capital accumulation, we prove that relative factor intensity between sectors drastically shapes the welfare analysis: two laissez-faire economies with the same global capital share may generate physical capital excess or scarcity, with respect to the optimum. The model for the Japanese economy, that experienced a factor intensity reversal after the oil shock, is then calibrated. It is shown that Japan invested relatively too much in human capital before 1975, but has not invested enough since 1990.

Mots clés: factor intensity differential; endogenous growth; social optimum; two-sector model

Domaines: Economies et finances

Marion Davin, Karine Gente, Carine Nourry. Should a Country Invest more in Human or Physical Capital? A Two-Sector Endogenous Growth Approach. 2013. ⟨halshs-00822391⟩