Abstract

One of the main topics that will be considered within this project is related to the consequences of limited insurance and diversification of idiosyncratic risks on human capital investment. In dealing with financial markets imperfections, investments in human capital are particularly interesting, because they are affected by all the different sorts of imperfections usually imputed to financial markets: liquidity constraints (see, for instance, Andolfatto and Gervais (2006), Cameron and Taber (2000a and 200b), Carneiro and Heckman (2002), de la Croix and Michel (2004), Fender and Wang (2000) and Hanushek, Leung and Yilmaz (2004)), hidden information and screening (see, for instance, Cremer and Pestieu (2004) and Jacobs and van Wijbergen (2005a, 2005b)), hidden action (see, for instance, Bovenberg and e Jacobs (2003) and De Fraja (2002)). Two additional problems are the impossibility of diversification (see, for instance, Christiansen, Joensen and Nielsen (2004)) and irreversibility (see, for instance, Dixit and Pyndick (1994) and Jacobs (2005)). The literature on investments in human capital has been growing exponentially in the last few years. The increasing policy relevance of this topic has been an important stimulus to research (for instance, think of the E.U.’s Lisbon Agenda). Looking at the recent European experience, empirical analyses show that, in all the main countries, there are very substantive public subsidies to investments in human capital (see, among many other papers, Blondal (2002), de la Fuente (2003), de la Fuente and Ciccone (2002), de la Fuente and Jimenos (2005) and Ciccone, Cingano and Cipollone (2006)). Evidently, these subsidies have opposite effects on private and social returns to education. Most of the analyses of the European experience show that private rates of returns are higher than the social ones and that they also exceed the typical rate of return on a portfolio of financial assets (see, in particular, de la Fuente (2003) and Ciccone, Cingano and Cipollone (2006)). This suggests that, from a Paretian viewpoint, further increases in the level of general subsidies is uncalled for (in fact, that the current level of subsidies is uncalled for).