Inducing Human Capital Formation:

How Efficient Is an Education Subsidy?

This paper presents a two-step job ladder model where a skilled individual faces uncertainty in getting a skilled job and an inferior (unskilled) job down the job ladder is the alternative employment opportunity. When the probability of getting the skilled job is low enough, the model suggests the optimal policy to reach the social optimum is taxing rather than subsidizing human capital investment. The paper analyses the conditions when migration can act as a substitute for subsidizing human capital formation by moving the private optimum closer to the social optimum.

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