Human Capital Investment Under Asymmetric Information: The Pigovian Conjecture Revisited

JOURNAL OF LABOR ECONOMICS, Vol. 14, No. 3, July 1996

Posted: 7 Feb 1997

See all articles by Chun Chang

Chun Chang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Yijiang Wang

University of Minnesota - Twin Cities - Carlson School of Management

Abstract

This article investigates how human capital investment, labor turnover, and wages are jointly determined when the current employer knows more about a worker's productivity than potential employers. Results derived are quite different from, or unexplored by, the standard human capital theory. We show that the information asymmetry can cause an externality distortion in human capital investment because higher productivity due to the investment may not be recognized by the market. The investment level increases in the degree of firm specificity of human capital. The underinvestment problem is more severe when human capital is general than when it is firm-specific.

JEL Classification: J24, J41

Suggested Citation

Chang, Chun and Wang, Yijiang, Human Capital Investment Under Asymmetric Information: The Pigovian Conjecture Revisited. JOURNAL OF LABOR ECONOMICS, Vol. 14, No. 3, July 1996, Available at SSRN: https://ssrn.com/abstract=3705

Chun Chang (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Yijiang Wang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

321 19th Avenue South
Industrial Relations Center
Minneapolis, MN 55455
United States
612-624-6814 (Phone)
612-624-8360 (Fax)

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