DP2533 The Theory of Human Capital Revisited: On the Interaction of General and Specific Investments

Author(s): Anke Kessler, Christoph L├╝lfesmann
Publication Date: August 2000
Keyword(s): General And Specific Training, Hold-Up Problem, Human Capital Formation
JEL(s): C78, D82, L14, L15
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2533

Human capital theory distinguishes between training in general-usage and firm-specific skills. In his seminal work, Becker (1964) argues that employers will not be willing to invest in general training when labour markets are competitive. However, they are willing to invest in specific training because it cannot be transferred to outside firms. The paper reconsiders Becker's theory. We show that there exists an incentive complementarity between employer-sponsored general and specific investments: the possibility to provide specific training leads the employer to invest in general human capital. Conversely, the latter reduces the hold-up problem that arises with respect to the provision of firm-specific training. These findings hold even if there is no technological link between the two types of training. We also consider the virtues of long-term contracting and discuss some empirical observations that could be explained by the model.