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General training in labor markets: Common value auctions with unobservable investment

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  • Rao, Neel

Abstract

This paper studies the puzzle of employer financing for the general training of workers. A parsimonious theory is developed based on asymmetric information between employers about the quantity of training. The labor market is modeled as a common value auction with an informed and an uninformed bidder. The novel feature of the game is that one of the bidders can make an unobservable investment that increases the value of the item before the auction. By randomizing the amount of training provided, an employer can create an endogenous adverse selection problem, enabling it to compress the wage structure and capture some returns from its training investment. The model generates continuous equilibrium wage and training distributions, and identical employees can receive different wage offers and training levels. A parametric example is used to illustrate how the shape of the wage distribution depends on the elasticity of production with respect to human capital.

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  • Rao, Neel, 2015. "General training in labor markets: Common value auctions with unobservable investment," Journal of Economic Behavior & Organization, Elsevier, vol. 120(C), pages 19-45.
  • Handle: RePEc:eee:jeborg:v:120:y:2015:i:c:p:19-45
    DOI: 10.1016/j.jebo.2015.07.013
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    1. Jin Li & Jun Yu, 2017. "A Theory Of Turnover And Wage Dynamics," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 223-236, January.

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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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