Buying In and Selling Out: The Dynamic Returns to Investing in Expertise

Abstract

A knowledge worker with hidden, durable, and inalienable expertise is employed on a sequence of projects by different principals, mediated by a labor market. Principals incentivize investment in the agent's expertise that they cannot fully capture, while expectations about contracts with future principals contribute to incentives today. Future surplus splits that favor the agent induce contracts today with stronger and more front-loaded incentives. Regimes arise endogenously: a serial founder repeatedly begins with temporary ownership, selling part of the firm after success; a serial trainee begins with full insurance, waiting to have their expertise rewarded. Competitive principals induce inefficiently high expertise.

Keywords: persistent private information, expertise, human capital, serial employment, labor market, dynamic agency

JEL Classification: D82, D86, J24, M54