While workers' provision for their old age motivates savings and determines capital accumulation in life-cycle models of consumption, overlapping generations models exhibit competitive equilibria in which older `capitalists' finance consumption by appropriating returns to the human capital embodied in middle-aged `workers' who are reimbursing the costs of their education; savings and accumulation are then restricted to the returns to the fixed factor. In Discussion Paper No. 923, Research Fellow Gilles Saint-Paul introduces rents into such a model by setting a ceiling to the human capital each young agent may acquire. The returns to human capital constrained by this upper bound exceed their cost, so rents to workers will become available for savings, which raises the overall income level. A temporary increase in the productivity of the fixed factor may trigger a jump from the low to the high equilibrium.

Saint-Paul also considers the effects of inequality among workers. While the return to human capital is the marginal worker's cost of acquiring education, inequality allows inframarginal workers to reap rents from their investment, which therefore boosts savings and accumulation. As inequality reaches a certain level, however, its indirect effect on the total numbers of workers receiving education may reinforce or counteract its direct effect on the rent. These results indicate that talent should not be allocated too evenly among those competing for scarce savings, since savers will then reap the entire surplus from funded projects. In contrast, an elite may foster growth by appropriating the benefits from their investment in human capital and later reinvesting them in the economy.

Public education also plays a key role in increasing the total savings available to finance accumulation by generating positive intergenerational spillovers. Without public education, all factors belong indirectly to the old, no income is left for the middle-aged, and the savings rate is zero. Public education therefore benefits growth by giving the young property rights in their own human capital, which then generate income and savings for next period's middle-aged.

The Role of Rents to Human Capital in Economic Development
Gilles Saint-Paul

Discussion Paper No. 923, March 1994 (IM)