The Knowledge Trap: Human Capital and Development Reconsidered", NBER Working Paper #14138

This paper presents a model where human capital differences- rather than technology differences- can explain several central phenomena in the world econ-omy. The results follow from the educational choices of workers, who decide not just how long to train, but also how narrowly. A "knowledge trap " occurs in economies where skilled workers disfavor learning deep, specialized knowl-edge. This simple idea can inform cross-country income differences, immigrant earnings, and price and wage differences across countries in a manner broadly consistent with existing empirical evidence. The model also provides insights about poverty traps, the brain drain, and the role for multinationals in develop-ment. More generally, this paper shows that standard human capital accounting methods can severely underestimate the role of education in development. It shows how endogenous educational decisions can replace exogenous technology differences in a range of economic reasoning