Market and Public Provision in the Presence of Human Capital Externalities

37 Pages Posted: 8 May 2006

See all articles by Gianni De Fraja

Gianni De Fraja

Universita' di Roma; University of Nottingham; Centre for Economic Policy Research (CEPR)

Date Written: January 2006

Abstract

This paper suggests that human capital externalities are important in determining whether goods and services should be privately or publicly provided. We study situations where that the cost incurred by an individual provider for providing quality is affected by the human capital of her colleagues. This is the case for goods such as health, education, legal services, police protection, and so on. The mode of provision (private or public) affects a supplier's incentive to acquire human capital and therefore her colleagues' cost of provision. The paper shows that either mode of provision may be preferable, depending on the nature of the human capital externality: private provision of the final goods and services provides stronger incentives to human capital acquisition (and may therefore be socially preferable) if own human capital and one's colleagues' human capital are substitutes, and suppliers with high human capital benefit more than suppliers with low human capital from their colleagues' human capital, but not excessively so.

Keywords: Human capital externality, training, public provision of private goods, education, health, public-private partnership

JEL Classification: H230, H420, J240

Suggested Citation

De Fraja, Gianni and De Fraja, Gianni, Market and Public Provision in the Presence of Human Capital Externalities (January 2006). CEPR Discussion Paper No. 5471, Available at SSRN: https://ssrn.com/abstract=901228

Gianni De Fraja (Contact Author)

Universita' di Roma ( email )

Dipartimento SEFEMEQ
Via Columbia n.2
Rome, Rome 00133
Italy

HOME PAGE: http://www.economia.uniroma2.it/docenti

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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