Skill Acquisition, Credit Constraints, and Trade

This paper looks at the e¤ect of credit constraints on skill acquisition when agents have heterogeneous abilities and wealth. We use a general equilibrium model and assume credit markets are absent. Two payment systems for training are explored. Under the …rst, payment is made up front and as a result, credit constraints are severe. In the second, a form of work study is allowed, and this helps mitigate credit constraints. We consider the system’s behavior both in and out of steady state and argue that there can be multiple equilibria as supply need not always be monotonic. Moreover, that stricter credit constraints need not shift supply inward. Also, opening the economy to trade could reduce welfare in steady state. An increase in the relative price of the skill intensive good raises the cost of education. As education becomes more expensive, credit constraints become more binding and the stock of skilled labor falls as does the supply of the skill intensive good and this permits welfare to fall.