Introduction to Modern Economic Growth capital accumulation It is not clear whether human capital investments will indeed respond so much to tax distortions For instance, if these distortions correspond to differences in corporate taxes or corruption, we would expect them to affect corporations rather than individual human capital decisions This is of course not to deny that in societies where policies discourage capital accumulation, there are also barriers to schooling and other types of human capital investments Nevertheless, the impact of these on physical and human capital investments may be quite different Second, and more important, the large implied elasticity of output to distortions when both physical and human capital are endogenous has an obvious similarity to the Mankiw-Romer-Weil’s approach to explaining cross-country differences in terms of physical and human capital stocks As discussed in Chapter 3, while this is a logical possibility, existing evidence does not support the notion that human capital differences across countries can have such a large impact on income differences This conclusion equally sheds doubt on the importance of the large contribution of human capital differences induced by policy differences in the current model Nevertheless, the conclusions in Chapter were subject to two caveats, which could potentially increase the role of human capital; large human capital externalities and significant differences in the quality of schooling across countries These issues will be discussed below 10.5 Capital-Skill Complementarity in an Overlapping Generations Model Our analysis in the previous section suggests that the neoclassical growth model with physical and human capital does not generate significant imbalances between these two different types of capital (unless we impose irreversibilities, in which case it can so along the transition path) We next investigate possibility of capitalskill imbalances in a simple overlapping generations model with impure altruism, similar to the models introduced in Section 9.6 of the previous chapter We will see that this class of models also generates only limited capital-skill imbalances Nevertheless, it provides a simple framework in which labor market frictions can be introduced, and capital-skill imbalances become much more important in the presence of such frictions We will also use the model in this section to go back to 480