A simple economic theory of skill accumulation and schooling decisions

We propose a model of schooling that can account for the observed heterogeneity in workers' productivity and educational attainment. Identical unskilled agents can get a degree at a cost, but becoming skilled entails an additional unobservable effort cost. Individual labor can then be used as a...

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Bibliographic Details
Published in:Review of economic dynamics 2006, Vol.9 (1), p.93-115
Main Authors: Blankenau, William, Camera, Gabriele
Format: Article
Language:English
Subjects:
Decision making
Economic theory
Economics of education
Education finance
Education policy
Financing
Human capital
Imperfect information
Informational frictions
Matching
Multiple equilibria
Productivity
Schooling
Signalling
Studies
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Summary:We propose a model of schooling that can account for the observed heterogeneity in workers' productivity and educational attainment. Identical unskilled agents can get a degree at a cost, but becoming skilled entails an additional unobservable effort cost. Individual labor can then be used as an input in pairwise production matches. Two factors affect students' desire to build human capital: degrees imperfectly signal productivity, and contract imperfections generate holdup problems. Multiple stationary equilibria exist, some of which are market failures characterized by a largely educated workforce of low average skill. Policy implications are explored.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2005.05.002