Efficient Ways to Finance Human Capital Investments

Espen R. Moen

Economica, 1998, vol. 65, issue 260, 491-505

Abstract: Standard theory predicts that if wages are determined by bargaining workers underinvest in human capital, as they bear all the investment costs yet receive only a share less than one of the return. I show that this result depends on the way the investments are financed. I introduce contingent loans, which do not accumulate interest if the borrower is unemployed. When the investments are financed by such loans, the interest payments are regarded as a (negative) part of the surplus the agents bargain over. As a result, a worker pays the same share of the interest as he receives of the return.

Date: 1998
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