Essays on the Production of Human Capital

Human capital has been shown to be important for economic growth (e.g. Hanushek and Woessman, 2008). Countries would not flourish and people would be less happy if individuals did not have at least some. Human capital is not fixed, however, as one can increase her human capital by investing in it. One way to do so is through education. People go to school in order to learn skills that are necessary to produce goods with economic value. Moreover, they learn skills that are relevant for later success in life. This might not only be important for their own success, but also for that of others. Persons may benefit from someone else’s education: people can learn from each other, and may be less likely to become a victim of crime if others are higher educated. This is often referred to as positive spillovers or ‘external’ effects. However, people may underinvest in human capital. They may not have the financial resources for education, they may be shortsighted, or simply do not see the value of education. This may not only harm them in terms of a lower probability to be employed or lower wages, it may also harm the society as a whole. External effects, as discussed above, might not be internalized if people do not invest enough in their human capital. Moreover, it might lead to higher educational inequality if some underinvest while others would not. For these reasons, the government interferes with people’s decisions with respect to schooling. That is, governments intervene in the market for education. They do so by jurisdiction, i.e. setting rules and regulations, and by subsidizing education. But how does a government intervene in an effective way? That is one of the main questions that economists of education are studying.