Equity-like Approach to Investment in Human Capital
Abstract
Investing in education can be viewed through the lens of financial markets, where human capital functions as an asset generating future returns. This study explores the concept of human capital contracts as innovative financial instruments that enable private-sector funding of education in exchange for a share of future income.
The paper applies the Capital Asset Pricing Model (CAPM) to evaluate such contracts, distinguishing between systematic and specific risks associated with human capital investments. A simulation model is developed to estimate expected income streams, discount them to present value, and assess the profitability of the investment from the investor’s perspective.
Empirical results demonstrate that the value of human capital contracts is highly sensitive to key parameters such as income growth, discount rates, and repayment percentages. The analysis also shows that while such contracts can expand access to education, their attractiveness depends on achieving a balance between risk and expected return.
References
Palacios, M. (2002). Human Capital Contracts: Equity-like Instruments for Higher Education.
Adam Smith (1904). The Wealth of Nations.
Mincer, J. (1974). Schooling, Experience, and Earnings.
National Statistical Institute (Bulgaria). Labour force data.
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