Optimal Contracts and Investment in General Human Capital under Common Agency

Christos Bilanakos ()

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

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.

Keywords: General Human Capital; Common Agency; Contracts. (search for similar items in EconPapers)
Pages: 22 pages
Date: 2011-05
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm and nep-lab
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Persistent link: https://EconPapers.repec.org/RePEc:ucy:cypeua:08-2011

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