TY - JOUR AU - Lochner,Lance AU - Monge-Naranjo,Alexander TI - Human Capital Formation with Endogenous Credit Constraints JF - National Bureau of Economic Research Working Paper Series VL - No. 8815 PY - 2002 Y2 - February 2002 UR - http://www.nber.org/papers/w8815 L1 - http://www.nber.org/papers/w8815.pdf N1 - Author contact info: Lance Lochner Department of Economics, Faculty of Social Science University of Western Ontario 1151 Richmond Street, North London, ON N6A 5C2 CANADA Tel: 519/661-2111 ext. 85281 Fax: 519/661-3666 E-Mail: llochner@uwo.ca Alexander Monge-Naranjo Department of Economics Pennsylvania State University 502 Kern Graduate Building University Park, PA 16802-3306 E-Mail: aum26@psu.edu AB - We study the accumulation of human capital and the behavior of consumption and earnings in a life cycle equilibrium model with endogenous borrowing constraints. Constraints arise endogenously from the inalienability of human capital and the limited punishments that creditors are able to impose on those who default. The endogeneity of borrowing constraints produces a number of interesting relationships. First, efficient borrowing limits are functions of individual observable characteristics and choices, especially ability and human capital investments. The connection between human capital investments and borrowing limits creates additional incentives to invest beyond those present in models with exogenous constraints. Second, government policies affect the incentives to default and, hence, the limits on private borrowing. As opposed to exogenous constraint models, additional subsidies for investment in human capital should be accompanied by increases in credit, since borrowers are more able to re-pay higher debts. Finally, general equilibrium considerations have an additional role, since borrowing limits depend on the returns to physical and human capital. We calibrate the model to U.S. data and are able to replicate key features of the economy regarding human capital investment, earnings, and consumption. The calibrated model is then used to study the steady state impacts of changes in government policies. We find that changes in bankruptcy laws can have sizeable effects on the accumulation of both human and physical capital. At the aggregate level, general equilibrium forces are important and can reverse the results predicted in partial equilibrium. Government subsidies to education (financed with a proportional tax on earnings) cause lenders to increase credit limits and substantially increase aggregate human and physical capital. Most importantly, we show that the implications of our model are very different from those of standard exogenous constraint models. For example, the effects of increases in initial wealth and government subsidies on investment are substantially greater in our model than in a similar model with exogenous constraints. ER -