LAUSR

Abstract This paper suggests that nepotism affects economic development by hindering human capital development. In our dynamic general equilibrium model, individuals perceiving nepotistic labor markets experience a weaker economic motive to invest in human capital. Nepotism is explained as an evolving cultural norm with different nepotistic equilibria, which are relevant for economic development. We test the central prediction of the model by relating scores from the Programme for International Student Assessment (PISA) to an indicator for perceived nepotism at the country level. Our findings indicate a negative association between nepotism and human capital. Subsample analysis and fixed effects estimations further corroborate the incentive narrative.