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Discretionary Acquisition of Firm-Specific Human Capital under Non-verifiable Performance

Author

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  • Akhmedov Akhmed

    (Sberbank, Moscow, Russia)

  • Suvorov Anton

    (Faculty of Economics, National Research University Higher School of Economics, Shabolovka 26, 119049, Moscow, Russian Federation)

Abstract

In this paper we develop a model of discretionary employee investment in firm-specific human capital. When a firm has full bargaining power, the non-contractibility of this investment completely undermines the employee’s incentives. However, the incumbent firm’s inability to observe competing wage offers at the interim stage prevents it from completely expropriating the surplus, thereby creating incentives for the employee to invest. We demonstrate that commitment to a wage floor for the second period destroys the worker’s incentives to acquire human capital, but makes turnover efficient. Therefore, such a commitment has value only if the return on the employee’s deliberate investment in human capital acquisition is sufficiently low. When firms are privately informed about the productivity of their human capital acquisition technology, more productive firms offer higher entry wages to separate themselves from less productive firms. Furthermore, in contrast to the case of symmetric information about human capital acquisition technology, the commitment opportunity now has value for firms with higher return on investment: commitment to a wage floor acts as a substitute for raising the entry wage.

Suggested Citation

  • Akhmedov Akhmed & Suvorov Anton, 2014. "Discretionary Acquisition of Firm-Specific Human Capital under Non-verifiable Performance," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 14(1), pages 1-34, February.
    • Handle: RePEc:bpj:bejtec:v:14:y:2014:i:1:p:34:n:1
    DOI: 10.1515/bejte-2012-0007
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    References listed on IDEAS

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    1. Canice Prendergast, 1993. "The Role of Promotion in Inducing Specific Human Capital Acquisition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 523-534.
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    3. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
    4. John Moore, 1985. "Optimal Labour Contracts when Workers have a Variety of Privately Observed Reservation Wages," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(1), pages 37-67.
    5. Chang, Chun & Wang, Yijiang, 1996. "Human Capital Investment under Asymmetric Information: The Pigovian Conjecture Revisited," Journal of Labor Economics, University of Chicago Press, vol. 14(3), pages 505-519, July.
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    Cited by:

    1. Paul Castãneda Dower & Andrei Bremzen, 2012. "Almost Anonymous Implicit Contracting," Working Papers w0187, Center for Economic and Financial Research (CEFIR).

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