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Abstract

This paper explores the role of wage structure as implicit insurance on human capital. It is shown that smaller wage differentials in the developed world can be welfare-enhancing by providing implicit insurance while larger wage differentials in underdeveloped countries make investments in human capital riskier. In other words, the students in a developed country are insured against poor educational outcomes through the existence of well-paid alternative employments which are not present in the economy of a less developed country. These results arise in a general equilibrium model when there are no insurance markets for human capital.

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