The authors examine an endogenous growth model in which market frictions are an integral part of the economic environment.
Workers invest in education when young, which raises their productivity once employed.
The level of schooling also acts as a key determinant of the rate of economic growth by influencing workers' ability to accumulate additional human capital on the job. Once schooling is completed, workers search for employment. The division of the surplus between vacancies and searching workers is characterized, as is the optimal level of education. The economy may display multiple steady-state growth paths.