Human Capital Evolution and Economic Crisis: Minding 'The Gap'

Abstract

When an economy experiences crisis that reduces the level of human capital stock, such a change should be accompanied by a change in the investment level. Is this always the best thing to do? In an optimal growth model of human capital evolution this paper shows that cutting down investment during crisis may not always be the optimal response to crisis. At certain levels of human capital, maintaining the pre-crisis level of investment is optimal and may be crucial for economic success.