Wealth Distribution, Investment in Human Capital and Occupational Choice When Capital Markets Are Imperfect

Abstract

In order to study the long-run effects of agents’heterogeneity we consider overlapping generations of individuals who differ from one another in wealth and inefficiency level. When young, agents choose whether to invest or not in human capital. Since the net return of human capital investment is positive, agents who can afford such an investment, do invest. In thesecond period of life, agents make an occupational choice. They choose to be workers or entrepreneurs. There exists a critical level of in efficiency be low which becoming entrepreneur is profitable. The wealth distribution and the occupational structure of agents changes overtime, the former being the cause and the effect of thelatter. Thelong run wealth distribution is stationary and can be either ergodic ornot, with long-run occupational mobility or not. We show how the economy’s structural parameters and the types of intergenerational transmission of skills affect the dynamic patterns and thelong-run equilibria.