Abstract

Asymmetric information, adjustment costs and allocative efficiency: microeconomic foundation.
Does investment in human capital necessarily generate positive externalities, so that too little investment occurs in equilibrium? This is the question confronted in this research program.
The analysis of the externalities related to investments in human capital has been going on for quite a few years. Recent surveys include Moretti (2004), and Halfdanarson, Heuermann, Südekum (2008). In the discussion of market related externalities, the canonical distinction is between technological (Lucas (1988)) and pecuniary externalities (Acemoglu (1996)). The existence of significant positive externalities is a canonical assumption in many influential models of growth and, more relevant, it is one of the motivation for the policy of heavy ubsidization of all levels of education in many countries. Still, the precise microeconomics mechanism which should generate them is still not fully understood. This is a particularly
serious problem because, from the empirical viewpoint, the search for significant positive externalities has been elusive a best (see, for instance, Heckman et al. (1996) and Acemoglu and Angrist (2001) reach a negative conclusion for the U.S., De la Fuente (2003) for the E.U. countries). In this part of the project, we plan to focus on the nature of the possible pecuniary externalities. On this issue, the canonical reference is Acemoglu (1996), He considers economies where a hold-up problem arises, due to imperfect labor markets,
characterized by matching and bargaining. This implies that agents do not fully appropriate the returns on their irreversible investments. Firms, due to the labor market frictions, take into consideration the expected level of human capital of their potential workers when choosing their investments in physical capital. Thus there is a positive pecuniary externality so that the investment in human capital is suboptimal in equilibrium. A key feature of this approach is that human capital is perfectly fungible, since it simply translates into different amounts of efficiency units of (homogeneous) labor. However, if we consider Roy (1951)-type model of economies, opposite conclusions can be reached. The key feature of the Roy model is that human capital is an heterogeneous commodity and different kinds of it are not perfect substitutes. Hence, workers make their choice at both the intensive and the extensive margin, and they self-select into different labor markets. Roy's models provide a richer framework to the analysis of human capital issues, from both the theoretical and the empirical viewpoints (a discussion of the different empirical implications of efficiency
units vs. Roy models is, for instance, in Carneiro et al. (2001)). Recent contributions (see Charlotte and Decreuse (2005) and Mendolicchio, Paolini and Pietra (2010b)) have shown that in search economies with random-matching and skilled and unskilled labor, steady-state equilibria are typically characterized by excessive investments in human capital. The same holds true in two-sectors economies which closely mimic the one considered in Acemoglu (1996) (see Mendolicchio, Paolini, Pietra (2012)). The change in the nature of the externality, from positive to negative, is essentially due to the role played by the composition of the
labor force in Roy economies. When agents are heterogeneous in terms of innate ability, and only workers of ability above an (endogenous) threshold invest in skills, an increase in the value of the threshold changes the skill composition of the labor force, increasing the expected productivity of both low and high skill workers. In turn, hiring decisions by firms are based on the expected distribution of the human capital of the workers in the two types of labor markets. As this rises, firms investments in physical capital also rise, raising wages and welfare. Hence, equilibria are characterized by overinvestment in high skills at the aggregate level. The current research program aims to study some set of conditions where, due to the consequences of the composition of the labor force in different markets, over-education may hold at the equilibrium. The most convenient framework is the one of perfectly competitive labor markets, because this allows us to isolate the precise impact of the composition effect. We aim to provide a fairly general analysis of the phenomena which may induce negative pecuniary externalities related to the investments in human capital. Some preliminary results have been reached in cooperation with D. Paolini (a member of the Sassari unit of this
Project) and C. Mendolicchio (IAB). Moreover, we plan to analyze the implications of our results in terms of observability of these externalities and in terms of disentangling the signaling and productivity augmenting components of the effects of the investments in human capital.