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Optimal Contracts and Investment in General Human Capital under Common Agency

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  • Christos Bilanakos

Abstract

This paper studies contracts and incentives to invest in general human capital under common agency. Both the worker and the employer have too weak investment incentives in equilibrium. The employer’s underinvestment results from his failure to internalize the positive impact of his investment on other firms’ productivity as well as from the fact that he gives a share of output to the worker in order to induce a higher effort contribution. The worker anticipates that she will not be the full residual claimant of benefits and underinvests in equilibrium, too. A benevolent government will choose a set of subsidies such that the worker’s investment relative to the employer is equal to the first-best relative investment intensity. If the number of employers is small, then the worker’s investment level is relatively low and the government must give a relatively higher subsidy to the worker in order to stimulate her investment incentives.

Suggested Citation

  • Christos Bilanakos, 2011. "Optimal Contracts and Investment in General Human Capital under Common Agency," University of Cyprus Working Papers in Economics 08-2011, University of Cyprus Department of Economics.
    • Handle: RePEc:ucy:cypeua:08-2011
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    File URL: https://papers.econ.ucy.ac.cy/RePEc/papers/08-2011.pdf
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    References listed on IDEAS

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    Keywords

    General Human Capital; Common Agency; Contracts.;
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