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Self-Promoting Investments

  • Carolyn Pitchik

When human capital skills differ in their ability to attract offers from alternative employers, a potential inefficiency in human capital investment arises. If a worker's ability and investments are observed by the labour market only when the worker invests in self-promoting activities, then high-ability workers overinvest in self-promotion. No bond is posted in the contract that both attains efficient investment and minimizes the bond subject to individual rationality constraints and the zero profit condition. The contract is one in which the firm (i) offers to match outside offers strategically and (ii) guarantees a minimum wage. The model predicts that, under both the spot market contract and the efficient contract, wage declines with seniority even when conditioning on high ability. This prediction is consistent with the stylized fact regarding the decline of wages with seniority in academia. The model can also explain how the seniority wage premium may vary across disciplines, time, and schools.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-229.

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Length: 33 pages
Date of creation: 21 Apr 2006
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-229
Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario
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  1. Ricart i Costa, Joan E, 1988. "Managerial Task Assignment and Promotions," Econometrica, Econometric Society, vol. 56(2), pages 449-66, March.
  2. Gibbons, Robert & Katz, Lawrence F., 1991. "Layoffs and Lemons," Scholarly Articles 3442782, Harvard University Department of Economics.
  3. Lorne Carmichael, 1983. "Firm-Specific Human Capital and Promotion Ladders," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 251-258, Spring.
  4. Paul R. Milgrom., 1987. "Employment Contracts, Influence Activities and Efficient Organization Design," Economics Working Papers 8741, University of California at Berkeley.
  5. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
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  7. Michael Waldman, 1989. "Up-or-Out Contracts: A Signaling Perspective," UCLA Economics Working Papers 556, UCLA Department of Economics.
  8. Bentley MacLeod & James M. Malcomson, 1985. "Reputation and Hierarchy in Dynamic Models of Employment," Working Papers 628, Queen's University, Department of Economics.
  9. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
  10. Hallock, Kevin F, 1995. "Seniority and Monopsony in the Academic Labor Market: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 654-57, June.
  11. Moore, William J & Newman, Robert J & Turnbull, Geoffrey K, 1998. "Do Academic Salaries Decline with Seniority?," Journal of Labor Economics, University of Chicago Press, vol. 16(2), pages 352-66, April.
  12. Bernhardt, Dan & Scoones, David, 1993. "Promotion, Turnover, and Preemptive Wage Offers," American Economic Review, American Economic Association, vol. 83(4), pages 771-91, September.
  13. repec:oup:qjecon:v:113:y:1998:i:1:p:78-118 is not listed on IDEAS
  14. Ransom, Michael R, 1993. "Seniority and Monopsony in the Academic Labor Market," American Economic Review, American Economic Association, vol. 83(1), pages 221-33, March.
  15. Chen, Zhiqi & Ferris, J Stephen, 1999. "A Theory of Tenure for the Teaching University," Australian Economic Papers, Wiley Blackwell, vol. 38(1), pages 9-25, March.
  16. Siow, Aloysius, 1998. "Tenure and Other Unusual Personnel Practices in Academia," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(1), pages 152-73, April.
  17. Edward P. Lazear, 1984. "Raids and Offermatching," NBER Working Papers 1419, National Bureau of Economic Research, Inc.
  18. Daron Acemoglu & Jorn-Steffen Pischke, 1996. "Why Do Firms Train? Theory and Evidence," NBER Working Papers 5605, National Bureau of Economic Research, Inc.
  19. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  20. Bernt Bratsberg & James F. Ragan Jr. & John T. Warren, 2003. "Negative Returns to Seniority: New Evidence in Academic Markets," ILR Review, Cornell University, ILR School, vol. 56(2), pages 306-323, January.
  21. repec:tpr:qjecon:v:113:y:1998:i:1:p:78-118 is not listed on IDEAS
  22. Carmichael, H Lorne, 1988. "Incentives in Academics: Why Is There Tenure?," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 453-72, June.
  23. Robert H. Topel, 1990. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," NBER Working Papers 3294, National Bureau of Economic Research, Inc.
  24. Paul R. Milgrom, 1984. "Job Discrimination, Market Forces and the Invisibility Hypothesis," Cowles Foundation Discussion Papers 708R, Cowles Foundation for Research in Economics, Yale University, revised 1985.
  25. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
  26. repec:tpr:qjecon:v:102:y:1987:i:3:p:453-76 is not listed on IDEAS
  27. repec:oup:restud:v:53:y:1986:i:3:p:325-47 is not listed on IDEAS
  28. Blass, Asher A, 1992. "Does the Baseball Labor Market Contradict the Human Capital Model of Investment?," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 261-68, May.
  29. Smith Freeman, 1977. "Wage Trends as Performance Displays Productive Potential: A Model and Application to Academic Early Retirement," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 419-443, Autumn.
  30. Kahn, Charles & Huberman, Gur, 1988. "Two-sided Uncertainty and "Up-or-Out" Contracts," Journal of Labor Economics, University of Chicago Press, vol. 6(4), pages 423-44, October.
  31. repec:oup:restud:v:54:y:1987:i:3:p:437-59 is not listed on IDEAS
  32. 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 505-19, July.
  33. repec:oup:restud:v:52:y:1985:i:4:p:647-63 is not listed on IDEAS
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