The idea that market and non-market processes function in ways that exacerbate initial differences in human capital and wealth, has been at the centre of economic theory for decades. Though there are a number of channels through which such intergenerational transmission of poverty and inequality may occur, economists have noted the importance of imperfect credit markets, fiscal policies, threshold externalities, mortality differentials and institutions. This thesis highlights some of these processes and concentrates on the theories of multiple equilibria. The thesis is divided into three parts. The first chapter deals with the relationship between human capital, child labour and mortality and shows how multiple equilibria may emerge. The second paper analyses the role of foreign aid in overcoming child labour traps. The final chapter analyses the role of political and economic institutions in FDI policies.Chapter 1 identifies situations in which child labour is a temporary phenomena and situations in which it is not. The paper utilizes a three period OLG model with endogenous life expectancy and child labour, with both, private and public education systems. It is shown that under certain assumptions the evolution of child labour exhibits an ``inverted-U" shaped pattern, suggesting that the problem of child labour is a temporary stage of economic development. In this case human capital inequalities are temporary. But the results also show that under reasonable assumptions child labour may show long run persistence and human capital distribution may exhibit polarization. The novel feature of the paper is that it shows how theinteraction between human capital and life expectancy is crucial to child labour dynamics and can create multiple equilibria.Chapter 2 studies a model where multiple equilibria emerge in a model where mortality is exogenous but fertility and child labour decisions are endogenous. In a three period overlapping generations model with child labour, exogenous increases in child health endowments increase child labour and fertility. On the other hand, cash transfer and compulsory education funded through foreign aid have a negative effect on child labour. Foreign aid has a positive effects on fertility if cash transfers for child support are unconditional, and no effect if transfers are conditional on time spent in school. This result supportsconditional cash transfer programs like the Brazilian Bolsa Familia.The first two chapters show how variations in the initial levels of human capital lead to widely divergent long run outcomes. In the third chapter attention is shifted to a different type of initial condition, namely political and economic institutions. Both Brazil and India are important emerging economies and despite many similarities their approach towards foreign direct investment (FDI) has been markedly different. This chapter analyses the reasons behind this from a historical perspective. Following previous literature it is argued that historical experiences of the two nations exerted a lasting influence on economic policies followed by the two economies. In nineteenth century Brazil, initial industrial growth was closely related to international trade and international finance. Further, for a number of reasons, entrepreneurs and policy makers were more open to foreign investments. In contrast, in India, colonization led to a negative perception with regards to foreign investment and as a result FDI played a limited role in the economy until the 1990's. Even in the neo-liberal era, though both economies have opened their economies to FDI, India continues to restrict its role and has followed a more gradualist approach.
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