Dynamic evolution of income distribution and credit-constrained human capital investment in open economies

This paper shows how the degree of credit-market imperfections affects the steady-state distributions of income and wealth, human capital investment, and the pattern of comparative advantage. The impact of trade liberalization on the accumulation of human capital depends on how it affects (1) the incentives to accumulate human capital, (2) the borrowing constraints facing human capital accumulation, and (3) the distribution of income and wealth. If the degree of credit market imperfections is low in the skill-abundant countries and high in the skill-scarce countries, then trade liberalization can increase investments in human capital in both types of countries. (C) 2001 Elsevier Science B.V. All rights reserved.