American Economic Review: Vol. 95 No. 5 (December 2005)
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Human Capital Formation, Life Expectancy, and the Process of Development
Cervellati, Matteo, and Uwe Sunde. 2005. "Human Capital Formation, Life Expectancy, and the Process of Development." American Economic Review, 95(5): 1653-1672.
We provide a unified theory of the transition in income, life expectancy, education, and population size from a nondeveloped environment to sustained growth. Individuals optimally trade off the time cost of education with its lifetime returns. Initially, low longevity implies a prohibitive cost for human capital formation for most individuals. A positive feedback loop between human capital and increasing longevity, triggered by endogenous skill-biased technological progress, eventually provides sufficient returns for widespread education. The transition is not based on scale effects and induces population growth despite unchanged fertility. A simulation illustrates that the dynamics fit historical data patterns.
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