Income and Wealth Distribution with Endogenous Wealth and Human Capital

Chapter 4 is concerned with a dynamic interdependence between economic growth and human capital. The literature on endogenous knowledge and economic growth has increasingly expanded in recent decades. Nevertheless, in the Uzawa-Lucas model and many of their extensions and generalizations, it implicitly assumes that all skills and human capital is formed due to formal schooling. Nevertheless, much of human capital may be accumulated in family and many other social and economic activities. This chapter introduces other sources of learning into the Uzawa-Lucas two-sector growth model. Different households have different propensities to save and to receive education and have different abilities in absorbing knowledge and increasing human capital through education, learning by doing and learning by consuming. Most of the extensions and generalizations of the Uzawa-Lucas model are limited to a single representative household. Heterogeneous households make investments in schooling quantity and quality. The main deviation of my approach from the previous models is that I derive demand of education in an alternative approach to the typical Ramsey approach. The model in this chapter is built on the three main growth models—Solow’s one-sector growth model, Arrow’s learning by doing model, and the Uzawa-Lucas’s growth model with education—in the growth literature. It constructs the dynamic model with endogenous wealth and human capital and shows the dynamics of the economic system and its properties. It also shows the effects of changes in the RC’s propensity to obtain education, the RC’s propensity to save, and the RC’s population.