Training Contracts, Worker Overconfidence, and the Provision of Firm-Sponsored General Training

77 Pages Posted: 18 Feb 2013 Last revised: 6 Jul 2013

See all articles by Mitchell Hoffman

Mitchell Hoffman

University of Toronto - Rotman School of Management; National Bureau of Economic Research (NBER)

Stephen V. Burks

University of Minnesota, Morris - Division of Social Science; Institute for the Study of Labor (IZA); Center for Decision Research and Experimental Economics (CeDEx); Center for Transportation Studies, University of Minnesota

Date Written: May 31, 2013

Abstract

Training by firms is a central means by which workers accumulate human capital, yet firms may be reluctant to provide general training if workers can quit and use their gained skills elsewhere. “Training contracts” that impose a penalty for premature quitting can help alleviate this inefficiency. Using two exogenously staggered contract changes at a leading trucking firm, we show that training contracts significantly reduce post-training quitting and increase the profitability of training. We demonstrate further that training contracts have especially large effects on training profits in our setting because of their interaction with worker overconfidence. If workers are overconfident about their own productivity at the current firm relative to their outside option, they will be more likely to sign training contracts and less likely to quit after training. Combining weekly productivity data with weekly productivity beliefs, we show that workers systematically overpredict their productivity, both with and without randomized financial incentives for accurate prediction. To quantify the impact of overconfidence for optimal contracts and welfare, we develop and estimate a structural learning model with biased beliefs that accounts for many key features of the data. Eliminating worker overconfidence would moderately increase worker welfare by 1.7%, but would decrease training profits by over $8,000 per truck and substantially alter the optimal training contract. We confirm the feasibility of eliminating overconfidence using an information experiment at a second large trucking firm. Despite the positive effect of training contracts on profits, training may not be profitable unless workers are overconfident.

Keywords: Firm-sponsored general training, training contracts, overconfidence

JEL Classification: M53, J24, D03, J41

Suggested Citation

Hoffman, Mitchell and Burks, Stephen V., Training Contracts, Worker Overconfidence, and the Provision of Firm-Sponsored General Training (May 31, 2013). Available at SSRN: https://ssrn.com/abstract=2220043 or http://dx.doi.org/10.2139/ssrn.2220043

Mitchell Hoffman (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen V. Burks

University of Minnesota, Morris - Division of Social Science ( email )

600 East 4th St.
Morris, MN 56267
United States
320-589-6191 (Phone)
320-589-6117 (Fax)

HOME PAGE: http://www.morris.umn.edu/academics/truckingproject/

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=1883

Center for Decision Research and Experimental Economics (CeDEx) ( email )

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United Kingdom

HOME PAGE: http://www.nottingham.ac.uk/cedex/people/external/index.aspx

Center for Transportation Studies, University of Minnesota ( email )

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511 Washington Ave. SE
Minneapolis, MN
United States
612-626-1077 (Phone)
612-625-6381 (Fax)

HOME PAGE: http://www.cts.umn.edu/

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