Human Capital Risk, Contract Enforcement, and the Macroeconomy

Tom Krebs of the University of Mannheim, Moritz Kuhn of the University of Bonn, and Mark Wright of UCLA discuss "Human Capital Risk, Contract Enforcement, and the Macroeconomy." In their research, they develop a macroeconomic model with physical and human capital, human capital risk, and limited contract enforcement. They show analytically young (high-return) households are the most exposed to human capital risk and are also the least insured. A policy reform that makes consumer bankruptcy more costly leads to a substantial increase in the volume of credit and insurance.

The lecture is part of a day-long conference organized by James Heckman, Nobel Laureate and professor of Economics at the University of Chicago.The conference is titled "Financing Human Capital Investment" and gathered prominent economists and policy practitioners from across the globe.

The conference represents the beginning of a systematic effort to understand the relationship between human capital development at the micro and macro levels. It was unique in its bringing together of macroeconomists who consider the aggregate consequences of heterogeneity and microeconomists whose research focuses on education. These scholars normally do not communicate, yet their work must be integrated to understand the role of finance in human capital formation. Heckman suggested that the focus of the research network should be enriched by considering family and community influences to develop a comprehensive understanding of the determinants of human flourishing.

The conference was hosted by the Markets Network, which studies how market frictions affect human capital formation and which determines the effects of policies designed to overcome the borrowing constraints that arise in the presence of such frictions. The network is part of the Human Capital and Economic Opportunity Global Working Group (HCE), headed by Heckman, Hanover Investment Group’s Robert Dugger, and the University of Wisconsin – Madison’s Steven Durlauf.