DP16305 Investment in Human Capital under Endogenous Asymmetric Information

Author(s): Heski Bar-Isaac, Clare Leaver
Publication Date: June 2021
Programme Areas: Labour Economics, Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16305

When is general training under-provided? We study this classic question in a model of a competitive labour market. Workers vary in firm-specific and general skills. Firms' choices of information disclosure play a key role. Disclosing general human capital information on bad matches, but revealing nothing about good matches, leads to an efficient allocation of workers. This also creates adverse selection that enables workers to pay for efficient training. This information structure resembles the outplacement support commonly found in professional services firms. Moreover, it implies that wages of released workers can be higher than wages of those who are retained.