Should a country invest more in human or physical capital?
Abstract
Should a country invest more in human or physical capital? 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 identical laissez-faire economies with different sectoral capital shares may generate physical capital excess or scarcity, with respect to the optimum. The design of optimal policy depends on the sectoral properties and the social planner discount rate.