Human capital investment, and the inefficiency of compensation based on marginal productivity: the static case
A simple extension of the traditional analysis of human capital accumulation is considered in a general equilibrium context. When real wages are equated to marginal products in the presence of human capital investment, resulting equilibria are almost never efficient even by very weak criteria. This is true even though labor is not a quasi-fixed factor, and informational asymmetries are excluded from the model. It is shown that human capital investment generates externalities, and has associated with it a “free-rider problem.” This, in turn, explains the common practice of employers requiring minimum levels of human capital accumulation for some employees, and refusing to hire “overqualified” workers for other positions.
|Date of creation:||1982|
|Date of revision:|
|Contact details of provider:|| Postal: 90 Hennepin Avenue, P.O. Box 291, Minneapolis, MN 55480-0291|
Phone: (612) 204-5000
Web page: http://minneapolisfed.org/
More information through EDIRC
|Order Information:||Web: http://www.minneapolisfed.org/pubs/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John G. Riley, 1974.
UCLA Economics Working Papers
050, UCLA Department of Economics.
- Riley, John G, 1976.
"Information, Screening and Human Capital,"
American Economic Review,
American Economic Association, vol. 66(2), pages 254-60, May.
- Spence, Michael, 1974. "Competitive and optimal responses to signals: An analysis of efficiency and distribution," Journal of Economic Theory, Elsevier, vol. 7(3), pages 296-332, March.
- Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
- Weiss, Yoram, 1971. "Learning by doing and occupational specialization," Journal of Economic Theory, Elsevier, vol. 3(2), pages 189-198, June.
- M. J. Piore, 1972. "Notes for a Theory of Labor Market Stratification," Working papers 95, Massachusetts Institute of Technology (MIT), Department of Economics.
- Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-20, September.
When requesting a correction, please mention this item's handle: RePEc:fip:fedmwp:205. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jannelle Ruswick)
If references are entirely missing, you can add them using this form.