Who Should Invest in Firm Specific Training?
31 Pages Posted: 8 Feb 2001
Date Written: February 2, 2001
We study experimentally whether employers or workers should invest in firm specific training. Only workers are assumed to have an alternative trading opportunity. Both the turnover costs case where this alternative takes the form of an outside option and the no-friction case where it serves as a threat point are considered. Theory predicts that in the turnover costs case employers have better investment incentives when the outside wage is high, and therefore should make the investment from an efficiency point of view. In the no-friction case employers and workers are predicted to invest the same. Our results are by and large in line with these predictions. For the turnover costs case we do observe that employers invests more than workers do only when the outside wage is high. In the no-friction case employers and workers invest about the same when the outside wage is low, but workers invest more than employers do when this wage is high. Actual private investment returns provide a reasonable explanation for the observed differences. Overall the observed inefficiencies are remarkably similar across the different situations considered. As a result there is only weak evidence that the employer (worker) should make the investment in the turnover costs (no-friction) case.
Keywords: Specific Investments, Labor Relationships, Holdup
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