Technical Report From Physical to Human Capital Accumulation with Pollution

Motoyama, Takumi

16-03pp.1 - 25 , 2016-03 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
This study examines the process of economic development in an overlapping generations model where higher physical capital involves pollution and deteriorates the productivity of education. In this setting, households may not invest into education and multiple steady states of the physical/human capital ratio can arise, leading long-run production with low initial endowment (physical capital) to be higher than that with high initial endowment. This occurs because, owing to the low productivity of education caused by pollution, only physical capital accumulation occurs with high initial endowment, while physical and human capital accumulation occur with low initial endowment. This result is consistent with the resource curse. We also show that higher abatement technology can solve the resource curse problem since it helps households redirect physical capital accumulation toward human capital accumulation.

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