Using the two-period model to understand investment in human capital
Paserman, M. Daniele
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Citation (published version)M Daniele Paserman. 2017. "Using the two-period model to understand investment in human capital." National Tax Journal, Volume 70, Issue 1, pp. 185 - 204 (20).
In many textbooks, the decision to invest in human capital is presented in terms of the present discounted value of the lifetime stream of costs and benefits associated with the investment. I argue that this approach, while delivering some useful insights, also conflates subjective discount rates and market interest rates, obfuscates the role of credit market imperfections, and makes difficult the analysis of policy interventions and the effects of external shocks on human capital investment. I show instead how a simple two-period model can deliver the main insights about investment in human capital and is flexible enough to be used to model a wide variety of policy interventions.