Investment in Hierarchical Human Capital.

Advanced human capital requires "basic" human capital as an input. Physical capital does not, in general, have such hierarchical structure. This paper models optimal investment in hierarchical human capital as well as nonhierarchical physical capital. The authors analyze the steady state, transition dynamics, and endogenous growth properties of the system. The optimal program exhibits non-monotonicities in human capital stocks. This result has important implications for the optimal timing of investment in hierarchical human capital. The analysis also addresses the debate regarding the distribution of education expenditures and the divergence between ex-post and ex-ante rates of return to education. Copyright 2002 by Blackwell Publishing Ltd