Optimal Resource Allocation on Physical and Human Capital: Theoretical Modelling and Empirical Case Study of the United States

Abstract

This study expands the theoretical framework proposed by Mankiw et al. (1992) to explore optimal resource allocation between physical capital and human capital accumulation. Using United States data spanning from 1950 to 2019, it empirically examines the long-term cointegration relationships among per-capita final output, physical capital, and human capital. The empirical estimates, derived from a theory-based model, indicate that sustaining economic optimality in the US necessitates allocating approximately 25.13% to developing human capital and 26.23% to accumulating physical capital from real GDP. These allocations underscore the crucial roles of both physical and human capital in production, highlighting the equal importance of human capital in shaping economic output. Furthermore, the analysis reveals short-term interdependencies between these capitals and their immediate responses to output fluctuations. These insights into short-term dynamics provide essential implications for policymaking, enabling informed decisions on resource allocation and strategic economic planning.