A MICROFOUNDATION FOR SOCIAL INCREASING RETURNS IN HUMAN-CAPITAL ACCUMULATION

This paper proposes a microfoundation for social increasing returns in human capital accumulation. The underlying mechanism is a pecuniary e xternality due to the interaction of ex ante investments and costly bi lateral search in the labor market. It is shown that the equilibrium r ate of return on the human capital of a worker is increasing in the av erage human capital of the workforce even though all the production fu nctions in the economy exhibit constant returns to scale, there are no technological externalities, and all workers are competing for the sa me jobs.