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Adverse Selection, Short-Term Contracting, and the Underprovision of On-the-Job Training

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  • Hermalin, Benjamin

Abstract

This article argues that the existence of adverse selection (worker heterogeneity) can explain the underprovision of general training by employers. High-ability workers value the option to entertain outside wage offers once their abilty becomes known to the market. Offering short-term contracts is, therefore, a way to screen high-ability types from low-ability types. A firm is not willing to train workers under short-term contracts. Hence, despite the positive returns to training, training may be underprovided in equilibrium. More generally, this article contributes to the literature that seeks to explain the puzzling phenomenon of short-term contracts governing long-term buyer-seller relationships.

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Bibliographic Info

Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt3636n9n2.

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Date of creation: 01 Feb 1990
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Handle: RePEc:cdl:econwp:qt3636n9n2

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Related research

Keywords: general training; adverse selection; contract length; Social and Behavioral Sciences;

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Cited by:
  1. Antonio Nicolò & Piero Tedeschi, 2006. "Missing Contracts: On the Rationality of not Signing a Prenuptial Agreement," Working Papers 20060506, Università degli Studi di Milano-Bicocca, Dipartimento di Statistica.
  2. James M. Malcomson & James W. Maw & Barry McCormick, 2002. "General Training by Firms, Apprentice Contracts, and Public Policy," CESifo Working Paper Series 696, CESifo Group Munich.
  3. Fredrik Andersson, 2002. "Technological Change,Labour Contracts and Income Distribution," Finnish Economic Papers, Finnish Economic Association, vol. 15(1), pages 24-35, Spring.
  4. Stefano Comino & Antonio Nicolò & Piero Tedeschi, 2005. "Termination Clauses in Partnerships," Industrial Organization 0509007, EconWPA.
  5. Costello, Anna M., 2013. "Mitigating incentive conflicts in inter-firm relationships: Evidence from long-term supply contracts," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 19-39.
  6. Jean Tirole, 2009. "Cognition and Incomplete Contracts," American Economic Review, American Economic Association, vol. 99(1), pages 265-94, March.

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