A Product Market Theory of Training in Firms

Armin Schmutzler

No 1744, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: We develop a product market theory explaining why firms invest in general training of their workers and managers. We consider a model where firms first decide whether to invest in general human capital, then make wage offers for the trained employees in the market and finally engage in product market competition. Multiple equilibria can emerge, with and without training. Unlike existing theories of general training, our approach does not require asymmetric information on the labor market. Firms train, if others do the same, because they would otherwise suffer a competitive disadvantage or have to pay high wages to poach workers. In the case of worker training, government intervention can be socially desirable to turn training into a focal equilibrium.

Date: 2000-08-01
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