Strategic complementarities between innovative firms and skilled workers: The poverty trap and the policymaker's intervention

▶ Strategic dynamics of workers' decisions on skill investments are driven by imitative behavior. ▶ Firms' decisions on R&D activities depend on investment costs and the share of workers. ▶ Firms prefer to be innovative and workers prefer to be skilled when the share of them is above a certain threshold. ▶ The economy can be “trapped” in a bad equilibrium with unskilled workers and non-innovative firms. ▶ We conclude how public intervention can put the economy in the high equilibrium and what are the efficient ways to do so.