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Human capital creates insider power

Author

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  • Muysken, Joan
  • Zwick, Thomas

Abstract

This paper demonstrates that insiders can erect barriers to entry and skim rents by sinking costs in human capital when labour markets are otherwise perfectly contestable. The sunk costs nature of human capital investments may result from the need to satisfy ever increasing specialised skill requirements in our society. When outsiders can not threat with market entry, insiders invest inefficiently in human capital such that their rent share is maximized. This inefficiency results from the hold-up problem that arises since workers are not residual claimants of the human capital rents. On the other hand, since insiders´ investments are negatively correlated with the number of workers, this may lead to higher than efficient investments nevertheless. When outsiders have an effective entry threat, insiders are forced to accept higher employment of outsiders and share the reduced rents with them. However, full employment is not necessarily reached and in any case investments are higher and social rent is lower than optimal.

Suggested Citation

  • Muysken, Joan & Zwick, Thomas, 1999. "Human capital creates insider power," ZEW Discussion Papers 99-25, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:5241
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    File URL: https://www.econstor.eu/bitstream/10419/24310/1/dp2599.pdf
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    Cited by:

    1. Zwick Thomas, 2001. "Supply of Human Capital in Times of Skill Biased Technological Change / Die Reaktion des Humankapitalangebots auf qualifikationsverzerrten technischen Fortschritt," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 221(3), pages 322-335, June.

    More about this item

    Keywords

    Insider-Outsider; Human Capital; Rents; Unemployment; Hold-Up;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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