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Essays on Human Capital and Economic Development

Ahsan, Humna

[Thesis]. Manchester, UK: The University of Manchester; 2015.

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Abstract

This thesis explores three important factors that have been central to the pursuit of economicdevelopment especially in case of developing countries. These are human capital,corruption and institutions.The first chapter presents an analysis of the role of corruption in determining the distributionof income and, with this, the degree of poverty and inequality. The analysis isbased on an overlapping generations model in which individuals may seek to improvetheir productive efficiency (and hence earnings) by supplementing or substituting publiclyprovided services (such as education and health) with personal expenditures on humancapital investment. Because of capital market imperfections, their ability to do thisdepends on their inherited wealth which serves as collateral for loans. Corruption is reflectedin the pilfering of public funds and a reduction in public service provision, theeffect of which is to reduce the earnings of those who rely on such services and to exacerbatethe extent of credit rationing for these agents. The dynamic general equilibriumof the model is characterised by multiple steady states to which different income classesconverge. Higher levels of corruption lead to higher levels of poverty and may result incomplete polarisation between the rich and poor by eliminating the middle class.The second chapter presents an analysis of the threshold effects of human capital on economicgrowth. Using a sample of 126 countries (1970-2012), we estimate a dynamicthreshold panel model following Hansen (1999) and Caner & Hansen (2004). Our resultsare twofold: first, there exists a significant threshold level of development (proxied bycapital stock per capita) below which the effect of human capital on economic growthis insignificant, whereas it is positive significant above it; second, while looking into theimpact of institutional quality, we find significant thresholds of interaction between institutionalquality and development.