DP10492 | Growth and Human Capital: A Network Approach

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We study the interactions and dynamics of human capital, growth and inequality by explicitly embedding networks into a standard endogenous growth model with overlapping generations. The human capital of a household depends on investment in education and on average human capital of the household's network neighborhood. Network structure is crucial for both the long run outcomes and the transition of otherwise identical economies. Network cohesion above a certain threshold eliminates differences across households and leads to long run equality, while below the threshold, inequality is high and persists more often. During transition, (i) high overall growth is achieved when the network has high degree centralization and the most degree central node has high initial human capital and (ii) high individual household growth is achieved when the household has low human capital relative to its neighborhood and is located in a neighborhood that has high average human capital relative to the whole economy.