HUMAN CAPITAL CONTRACTS AS INVESTMENT PORTFOLIO

Abstract

Given the importance of education for a country’s development, most governments have subsidized higher education. This solution, however, is not sustainable in the light of the fiscal constrains faced by governments and the rising demand for tertiary education. This article makes an economic case for Human Capital Contracts (HCCs), an equity-like approach to financing education, first proposed by Milton Friedman. To achieve this we approach the problem using human capital theory, particularly from Gary Becker’s and Jacob Mincer’s work. The resulting equations permit an analysis of the role the different variables play in the valuation of HCCs. In the end we use date from The Financial Times’ “European Business School Ranking 2014” to illustrate how parameters in HCCs can be designed such that they become financially successful.