This paper analyses in a novel way how educational investments can improve human capital formation in Europe, based on a model of age-dependent skill formation featuring dynamic complementarities. Counterfactual investment policies are evaluated with an Atkinson-Sen welfare function. Investments for individuals under the age of eighteen years are traced back to their family and teaching environment, whereas adult individuals optimise their educational investments. The model is calibrated for a population living in 29 European countries. Our findings demonstrate that more educational investments need to be directed at childhood to foster human capital formation across all European countries. Furthermore, if equality is rated high enough in the welfare function, the most disadvantaged people should receive more compensating educational investments during childhood. In a uniform European labour market educational investments yield higher returns in low income countries, since the transformation of human capital to income is improved.


Human capital, age-dependent skill formation, educational investment, Europe