This paper develops new economic models to synthesize and interpret the empirical literature on human skill formation. It presents simple formal economic models of child development that capture the essence of recent findings from the empirical literature. The goal of this essay is to provide a theoretical framework for interpreting the evidence from a vast empirical literature, for guiding the next generation of empirical studies, and for formulating policy. Central to our analysis is the concept that childhood has more than one stage, and that policies need to be tailored to each one. We formalize the concepts of self productivity and complementarity of human capital investments and use them to explain the evidence on skill formation. Together, they explain why skill begets skill through a skill multiplier process. Skill formation is a lifecycle process. It starts in the womb and goes on throughout most of the adult life. Families play a

ABSTRACT __________________________________________________________________________ The current literature offers two views on the nature of the labor income process. According to the first view, which we call the “restricted income profiles ” (RIP) model, individuals are subject to large and very persistent shocks while facing similar life-cycle income profiles (MaCurdy, 1982). According to the alternative view, which we call the “heterogeneous income profiles ” (HIP) model, individuals are subject to income shocks with modest persistence while facing individual-specific income profiles (Lillard and Weiss, 1979). In this paper we study the restrictions imposed by the RIP and HIP models on consumption data—in the context of a life-cycle model—to distinguish between these two hypotheses. In the life-cycle model with a HIP process, which has not been studied in the previous literature, we assume that individuals enter the labor market with a prior belief about their individual-specific profile and learn over time in a Bayesian fashion. We find that learning is slow, and thus initial uncertainty affects decisions throughout the life cycle. The resulting HIP model is consistent with several features of consumption data including (i) the substantial rise in within-cohort consumption inequality, (ii) the non-concave shape of the ageinequality profile, and (iii) the fact that consumption profiles are steeper for higher educated individuals. The RIP model we consider is also consistent with (i), but not with (ii) and (iii). These results bring new

This paper studies consumption and labor supply in a model where agents have partial insurance and face risk and initial heterogeneity in wages and preferences. Equilibrium allocations and variances and covariances of wages, hours and consumption are solved for analytically. We prove that all parameters of the structural model are identified given panel data on wages and hours, and crosssectional data on consumption. The model is estimated on US data. Second moments involving hours and consumption show that the rise in wage dispersion in the 1970s was effectively insured by households, while the rise in the 1980s was not.

In this paper we revisit two well-known facts regarding lifecycle expenditures. The first is the familiar “hump ” shaped lifecycle profile of nondurable expenditures. The second is that cross-household consumption inequality increases steadily throughout the life cycle. We document that the behavior of total nondurables masks surprising heterogeneity in the lifecycle profile of individual consumption sub-components. We find that three categories (food, nondurable transportation, and clothing) account for both the entire decline in mean expenditure post-middle age and a substantial amount of the increase in cross sectional dispersion over the life cycle. All other nondurable categories we study show no decline in mean expenditure over the life cycle nor do they show an increase in cross sectional dispersion over the life cycle. We provide evidence that the categories driving life cycle consumption are either inputs into market work (clothing and transportation) or are amenable to home production (food). Changes in the opportunity cost of time will cause movements in expenditures on such goods even if there is no change to lifetime resources. We then discuss how the patterns documented in the paper

We present and estimate a model in which the choice between entrepreneurship and wage work may be influenced by financial market imperfections. The model allows for limited liability, moral hazard, and a combination of both constraints. The paper uses structural techniques to estimate the model and identify the source of financial market imperfections using data from rural and semiurban households in Thailand. Structural, nonparametric, and reduced-form estimates provide independent evidence that the dominant source of credit market imperfections is moral hazard. We reject the hypothesis that limited liability alone can explain the data. A previous version of this paper has been circulated under the title “Distinguishing

We argue that once we take into account the students ’ rational enrollment decisions, mismatch in the sense that the intended beneficiary of affirmative action admission policies are made worse off could occur only if selective universities possess private information about students’ post-enrollment treatment effects. This necessary condition for mismatch provides the basis for a new test. We propose an empirical methodology to test for private information in such a setting. The test is implemented using data from Campus Life and Learning Project (CLL) at Duke. Evidence shows that Duke does possess private information that is a statistically significant predictor of the students ’ post-enrollment academic performance. We also propose strategies to evaluate more conclusively whether the evidence of Duke private information has generated mismatch.

Between 1940 and 2000 there has been a substantial increase of educational attainment in the United States. What caused this trend? We develop a model of schooling decisions in order to assess the quantitative contribution of technological progress in explaining the evolution of education. We use earnings across educational groups and growth in gross domestic product per worker to restrict technological progress. These restrictions imply substantial skill-biased technical change (SBTC). We find that changes in relative earnings through SBTC can explain the bulk of the increase in educational attainment. In particular, a calibrated version of the model generates an increase in average years of schooling of 48 percent compared to 27 percent in the data. This strong effect of changes in relative earnings on educational attainment is robust to relevant variations in the model and is consistent with empirical estimates of the longrun income elasticity of schooling. We also find that the substantial increase in life expectancy observed during the period contributes little to the change in educational attainment in the model.

This paper sheds light on the nature of labor income risk by exploiting the information contained in the joint dynamics of households’labor earnings and consumption-choice decisions. In particular, this paper attempts to discriminate between two leading views on the nature of labor income risk: the “restricted income pro…les ” (RIP) model — in which individuals are subjected to large and persistent income shocks but face similar life-cycle income pro…les — and the “heterogeneous income pro…les”(HIP) model — in which individuals are subjected to income shocks with modest persistence but face individual-speci…c income pro…les. Although these two di¤erent income processes have vastly di¤erent implications for economic behavior, earlier studies have found that labor income data alone is insu ¢ cient to distinguish between them. This paper, therefore, brings to bear the information embedded in consumption data. Speci…cally, we apply the powerful new tools of indirect inference to rich panel data on consumption and labor earnings to estimate a rich structural consumption-savings model. The method we develop is very ‡exible and allows the estimation of income processes from economic decisions in the presence of nonseparabilities between consumption and leisure, partial insurance of income shocks, frequently

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I study the effect of market incompleteness on the aggregate economy in a model where agents face idiosyncratic, uninsurable human capital investment risk. The environment is a general equilibrium lifecycle model with a version of a Ben-Porath (1967) human capital accumulation technology, modified to incorporate risk. A CARA-normal specification keeps endogenous decisions independent of individual shock realizations. I study stationary equilibria of calibrated cases in which idiosyncratic uninsurable risk arises from specialization risk and career risk. Specialization risk is such that both mean and variance of the return from training are increasing in the endogenous decision to invest in human capital. In the case of career risk, however, only the mean return is increasing in the decision to invest in human capital. With career risk only, stationary equilibria resemble those studied by Aiyagari (1994), and one concludes that the impact of uninsurable idiosyncratic risk is relatively small. With a significant amount of specialization risk however, stationary equilibria are severely distorted relative to a complete markets benchmark. One aspect of this distortion is that human capital is only about 57 percent as large as its complete markets counterpart. This suggests that the two types of risk have very different and quantitatively significant general equilibrium implications. Keywords: Human capital risk, life-cycle, incomplete