DP2657 | Globalization and Human Capital Formation

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This Paper compares education investment in closed and open economies without government and with a benevolent government. Closed economies suffer from a hold-up problem of excessive redistribution, and governments use education policy as a second-best tool. Globalization that increases labour mobility reduces governments' incentives to provide subsidized education and increases private individuals' incentives for investment in their human capital. Globalization can improve welfare, and even restore full efficiency. Governments' scope for redistribution ? which is a substitute for private income insurance ? is reduced, and whether efficiency is restored depends on how private insurance markets react to the change in redistribution policy.