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The financing of the productive service through HCC
Jiří Mihola, Radim Valenčík
The University of Finance and Administration, Estonská 500, 101 00 Prague, Czech Republic
The use of HCC in areas of acquisition, utilization, and preservation of human capital. Economic effects of such sectors – acceleration of professional fulfillment, better professional performance, longer zenith and horizon of productive fulfillment. Proposal and substantiation of the HCC based on the transferred price to ensure that economic effects through the relevant mechanisms (and not on the basis of the institutional system entities) serve as the source of financing for the entities that contributed to them and are distributed based on the contribution of such entities to the achievement thereof. A transferred price is a contract, where a productive service recipient makes payments based on the potential benefits accrued as a result of the productive service and based on the amount of returns generated from the productive service – directly to the productive service provider. Effects of some productive services only materialize in the form of longer horizon of productive fulfillment.
Key words:human capital contracts, transferred price, productive service
The idea of financing one of the forms of productive services – tertiary education – in the form of HCC (human capital contracts) was first formulated in 1955 by M. Friedman The Role of Government in Education (1955), even before he wrote A Theory of the Consumption Function (1957), where Friedman formulated the idea of productive consumption – i.e. consumption enabling the acquisition and preservation of human capital.
Since the 1960s, we have seen many attempts of applying the aforementioned idea in practice, in different variations and with different results. For a long time, the Australian HECS system seemed to be the most successful of those attempts; the US MyRichUncle system also looked promising. Many specialized papers came into existence in connection with the design, improvement, and analysis of functioning of these systems, whereas the most significant works in terms of theory are those of N. Barr (2012), B. Johnston (1972, 1986, 2006), M. Palacios (2004), H. Vossensteyn (2005, 2009). The last researcher considerably clarified the term "HCC” and also tried to expand its application to the area of healthcare financing. In terms of the Czech Republic, mainly the following people are engaged in theoretical research of the given area: P. Matějů (2003, 2005), V. Urbánek (2007). The problems of HCC-based systems show that it is necessary to proceed significantly further in the theoretical analysis and modeling of HCC.
The following article was created by the team that has already successfully resolved three related projects of Czech Science Foundation – Efficiency of investments in human capital (2003-2005), Investments in social capital and efficiency (2006-2008), and Theory of redistribution systems (2009-2011).
In a way (in the form of searching for a primary theoretical model), the area is also studied by important Czech teams concentrated around R. Richta (particularly in the 1960s), Y. Strecková (particularly in the 1980s), and M. Potůček (present), who focused on the role of human potential in economic processes.
Theoretical conclusions are compared with the results of international research of adults OECD PIAAC and international research SHARE.
Compared to existing approaches:
- We clarify the HCC in question (the principle of transferred price play the key role in this regard).
- We expand the application of the HCC to the area of conveyed application of transferred price (i.e. in areas, where the effects of productive services become apparent by longer horizon of productive fulfillment, for example).
- We corroborate the relationship with the perspective trend of economic development associated with the growing role of productive services aimed at acquisition, utilization, and preservation of human capital.
- We create general model of the said type of the HCC, which will make it possible to create feedback between economic effects (and assessment of such effects on different markets) of all types of productive services and their financing (or to verify the hypothesis of whether this is a sufficiently general principle).
- Based on the HCC model and improvement of the data analysis methods, we assess, significantly more accurately, the effects of productive services (particularly in the area of education and health).
In the article we define the basic characteristics of HCC based on transferred price and show its importance for the increased role of the productive service sector. Consecutively we show the effects of productive services grow on economic grow.
(To be continued in the next part)
The study has been prepared with financial support received from specific research project Reforms of social investment and social insurance, the issue of preparation and implementation solved at The University of Finance and Administration in 2014-2015.