CXO

Maximizing Human Development

Date Added: Oct 2010
Format: PDF

The Human Development Index (HDI) is widely used as an aggregate measure of overall human well being. The authors examine the allocations implied by the maximization of this index, using a standard growth model - an extended version of Mankiw, Romer, and Weil's (1992) model - and compare these with the allocations implied by the golden rule in that model. They find that maximization of the HDI leads to the overaccumulation of both physical and human capital, relative to the golden rule, and consumption is pushed to minimal levels. They then propose an alternative specification of the HDI, which replaces its income component with a consumption component.