ECONOMIC UNDERDEVELOPMENT - THE CASE OF A MISSING MARKET FOR HUMAN-CAPITAL

This paper demonstrates that the coexistence of developed and underdeveloped countries can be a stationary equilibrium in a world economy with free trade in consumption goods and physical capital. An underdeveloped country is characterized by a high ratio of unskilled workers in the labor force, a small stock of physical capital, a low gross national product, a high rate of return on human capital and a corresponding large wage differential between skilled and unskilled workers. The critical assumptions are that future labor earnings cannot serve as collateral on a loan and indivisibilities in education.