DP11138 Relational Knowledge Transfers

Author(s): Luis Garicano, Luis Rayo
Publication Date: March 2016
Keyword(s): general human capital, international joint ventures, relational contracts
JEL(s): D86, J24, L24, M53
Programme Areas: Labour Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11138

An expert with general knowledge trains a cash-constrained novice. Faster training increases the novice’s productivity and his ability to compensate the expert; it also shrinks the stock of knowledge yet to be transferred, reducing the expert’s ability to retain the novice. The profit-maximizing agreement is a multi-period apprenticeship in which knowledge is transferred gradually over time. The expert adopts a " 1/e rule" whereby, at the beginning of the relationship, the novice is trained just enough to produce a fraction 1/e of the efficient output. This rule causes inefficiently lengthy relationships that grow longer the more patient the players. We discuss policy interventions.