Social Interactions and Segregation in Skill Accumulation

This paper studies human capital investment in a spatial setting with interpersonal complementarities. A mixture of local and global social interactions affects the cost of acquiring education, and the return to human capital is determined endogenously in the market. We study how spatially segregated investment equilibria are affected by an increase in the relative importance of global vis-à-vis local interactions. Per capita income level, equality, and welfare are shown to improve if the skilled constitute a majority to begin with, and if not, these implications are reversed. We also examine the effects of wider local neighborhoods, and lower mobility costs, and study a related two-group model based on social distance. (JEL: D31, O15, D85) (c) 2010 by the European Economic Association.