Should the firm or the employee pay for upskilling? A contract theory approach (original) (raw)

Managerial and Decision Economics

Abstract

Upskilling involves costly e¤ort on behalf of existing employees to acquire new skills that are required to execute high-value added projects. A …rm-…nanced training scheme allows the screening of applicants, but comes with the cost of hidden actions, as some employees might train themselves yet continue working on low-value projects. A policy relying on worker self-training and incentive compatible contracts allows attracting more workers to high-value projects, yet it must grant a positive informational rent to ‡exible workers. The analysis reveals the optimal contract speci…c to each of the two training schemes. The pro…t comparison reveals that the training strategy depends on the how large is the net value created by upskilling, which is a characteristic of the business or industry.

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