Do Long-Term Contracts Promote Firm Investment in General Human Capital? Discovering Movie Stars During the Hollywood Studio Era

Abstract

We explore the effect of long-term exclusive contracts between firms and workers on firm investment in employee general human capital, examining the de facto lifetime contracts between movie producers and actors that were used during the famous Hollywood studio era of the 1930s and 1940s. We investigate a particular form of investment: casting new actors in film roles in order to determine their appeal to audiences. We develop a model in which a firm accumulates information on worker ability through sequential task assignment. We assemble a data set and test the model’s predictions. We find that studio contracts are associated with substantial additional roles played, and that most of these additional roles were concentrated in an early career “discovery phase,” as the model predicts.