Natural resources, incentives and human capital: reinterpreting the curse*

ABSTRACT We show that natural resource rents when distributed as lump-sum transfers to individuals distort the incentive to invest in tertiary education. Developing an overlapping generations model for the case of natural resource rents we show that if transfers from natural resource wealth occur when a country's technology level is marginal, the chance that the country will be caught in a low-level equilibrium trap is high. Using data for 46 countries for which data are available over time, we find strong empirical support for the model in both dynamic panel estimates and cross-sectional estimates.