Abstract:
We show how the ability to accumulate human capital through formal education and through a
learning-by-doing process that occurs on the job affects the dynamic behavior of the human capital
stock under a liquidity-constrained and a non-constrained case. When there are alternatives to formal
schooling in the accumulation of human capital, investing resources in increasing school enrollment
rates in low-income countries may not be the most efficient means of increasing the human capital
stock. In addition, removal of liquidity constraints may not be sufficient to escape a development
trap.
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