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Optimal Contracts and Investment in General Human Capital under Common Agency

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Author Info

  • Christos Bilanakos

Abstract

This paper studies contracts and incentives to invest in general human capital under common agency. Both the worker and the employer have too weak investment incentives in equilibrium. The employer’s underinvestment results from his failure to internalize the positive impact of his investment on other firms’ productivity as well as from the fact that he gives a share of output to the worker in order to induce a higher effort contribution. The worker anticipates that she will not be the full residual claimant of benefits and underinvests in equilibrium, too. A benevolent government will choose a set of subsidies such that the worker’s investment relative to the employer is equal to the first-best relative investment intensity. If the number of employers is small, then the worker’s investment level is relatively low and the government must give a relatively higher subsidy to the worker in order to stimulate her investment incentives.

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File URL: http://papers.econ.ucy.ac.cy/RePEc/papers/08-2011.pdf
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Bibliographic Info

Paper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 08-2011.

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Length: 22 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:ucy:cypeua:08-2011

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Web page: http://www.econ.ucy.ac.cy

Related research

Keywords: General Human Capital; Common Agency; Contracts.;

This paper has been announced in the following NEP Reports:

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  1. Peters, Michael, 2001. "Common Agency and the Revelation Principle," Econometrica, Econometric Society, vol. 69(5), pages 1349-72, September.
  2. Martimort, David & Stole, Lars, 2009. "Selecting equilibria in common agency games," Journal of Economic Theory, Elsevier, vol. 144(2), pages 604-634, March.
  3. Filipe Almeida-Santos & Karen Mumford, . "Employee Training and Wage Compression in Britain," Discussion Papers 04/11, Department of Economics, University of York.
  4. Edwin Leuven, 2005. "The Economics of Private Sector Training: A Survey of the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 91-111, 02.
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