Specialization and Human Capital

Incentives for specialization, trade, and the production of comparative advantage through investment are shown to arise from increasing returns to utilization of human capital. Indivisibilities imply fixed-cost elements of investment that are independent of subsequent utilization. Hence the rate of return is increasing in utilization and is maximized by utilizing specialized skills as intensively as possible. Identically endowed individuals have incentives to specialize their investments in skills and trade with each other for this reason, even if production technology exhibits constant returns to scale.