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

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  • Benjamin Hermalin.

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 University of California at Berkeley in its series Economics Working Papers with number 90-139.

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Date of creation: 01 Feb 1990
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Handle: RePEc:ucb:calbwp:90-139

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Postal: University of California at Berkeley, Berkeley, CA USA
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Cited by:
  1. Comino, Stefano & Nicolò, Antonio & Tedeschi, Piero, 2010. "Termination clauses in partnerships," European Economic Review, Elsevier, vol. 54(5), pages 718-732, July.
  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. Tirole, Jean, 2008. "Cognition and Incomplete Contracts," IDEI Working Papers 453, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. 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.
  5. 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.
  6. Fredrik Andersson, 2002. "Technological Change,Labour Contracts and Income Distribution," Finnish Economic Papers, Finnish Economic Association, vol. 15(1), pages 24-35, Spring.

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