DP1719 Shareholders and Stakeholders: Human Capital and Industry Equilibrium

Author(s):	Roberto Ippolito, Marcus Miller, Lei Zhang
Publication Date:	November 1997
Keyword(s):	Credit Constraint, Industry Equilibrium, Industry-Specific Skill, irreversible investment, Stakeholder
JEL(s):	D41, J24
Programme Areas:	Human Resources
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1719

Producing high technology output and supplying sophisticated services often involves costly investment in industry-specific skills. But the threat of poaching means that it is the individual ?stakeholder?, not the firm, who must bear the cost. We investigate various mechanisms for funding human capital investment in an industry equilibrium framework where capital market imperfections would (in the absence of intervention) result in underinvestment. The main result is that government provision of loan guarantees (conditional on no-bankruptcy) leads to wage hikes which (by forcing exit of some firms thus increasing monopoly power) raise profits in a socially inefficient manner: income contingent loans and levy subsidy schemes, meanwhile, can result in a socially efficient outcome.