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Firm Specific Investments Based on Trust and Hiring Competition: A Theoretical and Experimental Study of Firm Loyalty

Author

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  • Siegfried K. Berninghaus
  • Luis G. Gonzalez
  • Werner Güth

Abstract

Two firms, each consisting of a team with the owner and just one employee, compete on the labor market with free labor mobility. After observing the investment decisions by firm owners their employees can engage in costly training, thus increasing their general and firm-specific productivity, which also depends on capital endowment. The trust problem is mutual since firm owners, when investing, do not know employees' willingness to engage in training, while employees must hope that future wage offers will reward training. The experimental results show that higher firm-specificity of human capital makes employees more willing to engage in training, while low specificity triggers over-investment by firm owners. Firm loyalty is found to be usually low.

Suggested Citation

  • Siegfried K. Berninghaus & Luis G. Gonzalez & Werner Güth, 2004. "Firm Specific Investments Based on Trust and Hiring Competition: A Theoretical and Experimental Study of Firm Loyalty," Papers on Strategic Interaction 2003-31, Max Planck Institute of Economics, Strategic Interaction Group.
    • Handle: RePEc:esi:discus:2003-31
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    File URL: ftp://papers.econ.mpg.de/esi/discussionpapers/2003-31.pdf
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    Cited by:

    1. Christoph Engel & Werner Güth, 2006. "Corporate Culture as a Resource for Management. Comment," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(1), pages 97-100, March.

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    Keywords

    hold-up problems; human capital; trust and reciprocity; team competition;
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