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

  • Hermalin, Benjamin

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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Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt3636n9n2.

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Date of creation: 01 Feb 1990
Date of revision:
Handle: RePEc:cdl:econwp:qt3636n9n2
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