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Optimal Contracts and Investment in General Human Capital under Common Agency

  • Christos Bilanakos

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.

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File URL: http://papers.econ.ucy.ac.cy/RePEc/papers/08-2011.pdf
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Paper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 08-2011.

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Length: 22 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:ucy:cypeua:08-2011
Contact details of provider: Web page: http://www.econ.ucy.ac.cy

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  1. Peters, Michael, 2001. "Common Agency and the Revelation Principle," Econometrica, Econometric Society, vol. 69(5), pages 1349-72, September.
  2. Edwin Leuven, 2005. "The Economics of Private Sector Training: A Survey of the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 91-111, 02.
  3. Almeida-Santos, Filipe & Mumford, Karen A., 2004. "Employee Training and Wage Compression in Britain," IZA Discussion Papers 1197, Institute for the Study of Labor (IZA).
  4. Martimort, David & Stole, Lars, 2009. "Selecting equilibria in common agency games," Journal of Economic Theory, Elsevier, vol. 144(2), pages 604-634, March.
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