A Model of Multi-Dimensional Human Capital Investment: Specific vs. general investments under uncertainty

Author Name ICHIDA Toshihiro  (Waseda University)
Creation Date/NO. July 2011 11-E-056
Research Project Study on International Trade and Firms
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Specialization and the division of labor are the sources of high productivity in modern society. When worker skills are multi-dimensional, workers may face a choice between general versus specific human capital investment. Given that individual agents face uncertainty in the relative output price, what are the optimal strategies for heterogeneous individual agents in human capital investment? In the absence of insurance markets, general investment gives an option value for changes in the environment. We analyze a model in which workers are born heterogeneous and are endowed with two-dimensional skills in different sectors, to determine if incentives exist for workers to invest in skills in which they had originally excelled or struggled. We find that some workers choose to invest in their weaker skill, via specific human capital investment, provided that the scale of the risk is big and that the parameter of relative risk aversion is greater than one. We find that there exist agents whose optimal human capital investment decisions reverse their ex ante comparative advantages ex post.