Investment In Firm-specific Human Capital Research Articles

Labor Representation in Governance as an Insurance Mechanism*

We investigate how Germany’s mandated 50% labor representation on supervisory boards affects layoffs and wage cuts during industry shocks. We hypothesize that parity codetermination helps the implementation of implicit contracts that insure employees against adverse shocks. We estimate difference-in-differences in employment and wages using panel data at the establishment level. The results show white-collar and skilled blue-collar workers employed by firms with parity codetermination are protected against layoffs and wage cuts during shock periods. Moreover, white-collar workers and skilled blue-collar workers pay an insurance premium of about 3% in the form of lower wages. In contrast, we find no evidence of insurance for unskilled blue-collar workers; they are neither protected against industry shocks, nor do they pay an insurance premium in the form of lower wages. These results suggest that parity-codetermined firms extend the insurance to encourage investment in firm-specific human capital by those whose skills and qualifications are more valuable.

Firm Specific Human Capital Investment in an Agency Relationship

This paper considers the twofold problem of compensation contracting and the design of a human capital investment scheme. Before contracting the principal and the agent can engage in a joint stochastic production process of exerting effort to raise the agent’s productivity in the firm. The principal can employ synchronous effort exertion or either actor can assume a leadership role. We determine which organizational design is best for the principal at the endogenously optimal compensation contract, depending on how the efforts interact. We also determine when it is optimal for the principal to subsidize the agent to improve profitability.

Toward a Theory of Perceived Firm-Specific Human Capital

Strategy research suggests that firm-specific human capital is a source of sustained competitive advantage, at least in part because it may constrain employee mobility. However, it is also typically assumed that employees are reluctant to invest in firm-specific skills because such investments may come at the cost of developing general skills, thereby reducing their attractiveness in the labor market. This creates a theoretical paradox: Employee investment in firm-specific human capital is crucial for value creation and appropriation, yet there is believed to be global underinvestment in firm-specific skills. We argue that the logic behind this theory depends on the assumption that firm-specific human capital is accurately and objectively perceived among labor market participants and that relaxing this assumption significantly limits conclusions that can be drawn about competitive advantage. The key takeaway is that perceptions of firm specificity, even if inaccurate, can be more important than objective firm-specific human capital in determining the likelihood that firm-specific human capital can be a source of sustained advantage. By relaxing the assumption of strong-form labor market efficiency, we develop propositions regarding how firms can facilitate and manage perceptions of firm specificity, thereby increasing the likelihood that a competitive advantage can be sustained. In doing so, we help reconcile some of the differing assumptions in micro and macro work on human capital and employee retention.

Remuneration and absenteeism on a large construction site

While scholarly consensus is that construction absenteeism is a serious and widespread problem, aggregate US and Canadian data show construction absenteeism rates substantially below cross-industry averages. While construction absenteeism research focuses on workplace culture and norms, contractors continue to manage absenteeism primarily as an individual problem. While remuneration and labour market conditions are generally acknowledged to influence construction absenteeism, little research has focused on these factors. High labour turnover in construction resolves the first two conundrums. Adapting to higher labour turnover by limiting investment in firm-specific human capital, contractors are quicker to fire absent workers reducing construction’s measured absentee rates. Higher labour turnover also constrains contractors’ ability to shape workplace culture while facilitating the individual treatment of absentee workers. The construction absentee literature’s methodological focus on workplace surveys explains the absence of research on labour market conditioning of construction absenteeism. This case study using payroll data from a large, unionized US industrial construction site shows not only that absenteeism leads to discharge, but also, that absenteeism is a precursor of both quits and discharges for reasons other than absenteeism. Furthermore, a 1 percentage point increase in the unemployment rate reduced the probability that a worker would be fired for absenteeism by 48%; a $100 increase in weekly overtime pay reduced a worker’s probability of being fired for absenteeism by 27% and a $100 increase in per diem or travel pay reduced a worker’s probability of being fired for absenteeism by 75%.

Optimal Information Asymmetry, Control Environment, and Investment in Firm-Specific Human Capital

ABSTRACT When future operations are expected to provide information rents, managers concerned with being replaced can entrench themselves with value-increasing firm-specific human capital (SHC). In motivating SHC investment, the firm trades off the incentive effects of an ex ante commitment to asymmetric information against the costs of compensation rents and private benefits. Firm value, therefore, is affected by (1) the accuracy with which the board observes and interprets information, and (2) the strength of the control environment restricting the manager's ability to benefit from concealing and diverting firm value. It is optimal to maintain a partially informed board to the mutual benefit of shareholders and managers, and for firms in a stricter control environment to maintain a more informed board. Due to the indirect effect on SHC, regulations that strengthen control adversely affect firm value unless the information and control environments are sufficiently biased toward managerial preferences. JEL Classifications: G30; G38; M12; M48.

Buying Loyalty: Theory and Evidence from Physicians

Skilled-services firms often lack full control over their key assets -- the relationships between their workers and clients. This problem can lead to investment holdups that distort labor market equilibria. We study how non-compete agreements (NCAs), which prohibit a worker from leaving a firm and then competing against it, can overcome this control problem. We show theoretically that NCAs reduce investment holdups and increase productive efficiency. These direct effects lead to higher worker earnings, larger returns to tenure, and longer job spells. However, NCAs also reduce the ex post bargaining power of workers, which can alter the structure of contracts. Using new survey data from physicians, we find that physicians with NCAs have contracts with output incentives that are more than twice as strong, they are over 40% more productive, earn 14% higher wages, and have within-job earnings growth that is 21 percentage points higher, despite being of the same average quality as physicians without NCAs. Decomposing earnings growth, we find that NCAs increase returns to both tenure and experience, suggesting that they promote general as well as firm-specific human capital investment. All of the effects increase in magnitude with the enforceability of state NCA laws.

Discretionary Acquisition of Firm-Specific Human Capital under Non-verifiable Performance

AbstractIn this paper we develop a model of discretionary employee investment in firm-specific human capital. When a firm has full bargaining power, the non-contractibility of this investment completely undermines the employee’s incentives. However, the incumbent firm’s inability to observe competing wage offers at the interim stage prevents it from completely expropriating the surplus, thereby creating incentives for the employee to invest. We demonstrate that commitment to a wage floor for the second period destroys the worker’s incentives to acquire human capital, but makes turnover efficient. Therefore, such a commitment has value only if the return on the employee’s deliberate investment in human capital acquisition is sufficiently low. When firms are privately informed about the productivity of their human capital acquisition technology, more productive firms offer higher entry wages to separate themselves from less productive firms. Furthermore, in contrast to the case of symmetric information about human capital acquisition technology, the commitment opportunity now has value for firms with higher return on investment: commitment to a wage floor acts as a substitute for raising the entry wage.

Marital Prenups? A Look at CEO Severance Agreements

Some theoretical literature on firm-specific human capital investment suggests that severance contracts generate strong incentives for CEOs to ensure firm profitability, while the agency problem theory argues severance agreements are a less effective executive compensation measure. Using a unique sample of S&P500 CEO severance agreements between 1993 and 2007, I examine whether and how the existence and structure of severance agreements influence subsequent firm performance, CEO investment behavior, as well as CEO turnover likelihood. I show that while firms with severance agreements tend to perform worse than firms without severance agreements, the structure of severance agreements also makes a significant difference in performance. In particular, I find that firms with cash-only severance contracts underperform other firms that also include equity elements in the agreement. In addition, I find that severance agreements affect CEOs’ risk-taking behavior in that they encourage CEOs to overinvest in R&D. The findings are robust to controls for possible endogeneity concerns. Consistent with these findings I show in event study analysis that shareholders react negatively when firms award CEOs severance contracts and positively when firms cease to do so. Moreover, executives with severance contracts are more likely to be forced out of their firms. Results indicate that severance agreements, rather than promoting incentive alignment between CEOs and shareholders, actually exacerbate agency problems which lead to overinvestment and poor subsequent firm performance.

Insider Privatization and Careers - A Clinical Study of a Russian Firm in Transition

Transition provides an unexplored opportunity to study how changes in ownership affect structure and human resource policies of firms. We investigate a unique data set (17 years, 1500 white collar workers) of a Russian insider-privatized firm. In contrast to conventional beliefs about insider-privatized firms, there is much evidence for restructuring. However, the firm becomes toploaded. There is massive hiring from the outside, in particular, for higher tiers in the hierarchy. As there is also less exit, in particular, from higher levels, previously existing career paths are blocked. This potentially distorts the incentives for investment in firm-specific human capital. We argue that weak property right enforcement may be the reason for our observations, and thus identify a novel channel through which institutions may affect firm efficiency.

Stock options and employees' firm-specific human capital under the threat of divestitures and acquisitions

This paper considers whether the first-best level of firm-specific human capital investment is attained by the use of stock option plans for workers and stock offers in acquisitions even though workers are threatened with the possibility of a divestiture and acquisition. We show that the first-best level of investment is achieved by a stock option plan with a positive exercise price for workers conditional on the event of a divestiture. We also suggest that, under certain conditions, a stock offer in acquisition can resolve a collusion problem between the target firm (TF) and its workers.

Stock Options and Employees' Firm-Specific Human Capital Under the Threat of Divesture and Aquisition

This paper considers whether or not the first-best level of firm-specific human capital investment is attained by the use of stock option plans for workers and the choice of the method of payment for acquisitions even though workers are threatened with the possibility of a divestiture and acquisition. We show that the first-best level of firm-specific human capital investment is achieved by a stock option plan with a positive exercise price for workers conditional on the event of a divestiture and acquisition. We also suggest that, under certain conditions, a stock offer in the acquisition can resolve a collusion problem in which the target firm may collude with workers and attempt to raise the acquisition tender price up to the level that is consistent with the first-best level of investment even though workers actually choose an inefficient level of investment.

Productivity Adjustments and Learning-by-Doing as Human Capital

This paper measures plant-level productivity gains associated with learning curves across the entire manufacturing sector. We measure these gains at plant startups and also after major employment changes. We find: 1) The gains are strongly associated with a variety of human capital measures implying that learning-by-doing is largely a firm-specific human capital investment. 2) This implicit investment is large; many plants invest as much in learning-by-doing as they invest in physical capital and much more than they invest in formal job training. 3) This investment differs persistently over industries and is higher with greater R&D. 4) Consistent with a learning-by-doing interpretation, the human capital investment is much larger following employment decreases than increases. We conclude that learning-by-doing is a major factor in wage determination, technical progress and asymmetric employment adjustment costs.

Workplace Mentoring in the Legal Profession

The purpose of this article is to direct the attention of economists to the phenomenon of workplace mentoring. There are indications that the incidence of mentor-protege relationships in certain occupations and industries is as high as 75 percent or more. This fact notwithstanding, the economics literature generally (and labor economics literature specifically) is virtually silent with respect to mentoring. By way of introducing the subject matter to the profession, we focus attention on mentoring in the legal profession. We are able to provide lower-bound estimates of the incidence of mentoring among lawyers. We then propose and discuss two explanations of the practice. In brief, mentoring (generally) may serve to: (1) enhance the efficiency of job matching, and (2) reduce employee turnover and enhance worker investment in firm-specific human capital by bonding workers and firms more closely together. At this early stage, we are able to report some evidence in support of function (2). In survey of top business executives, Roche [22] found that 63.5 percent of the 1,250 respondents had mentor, defined as a person who took personal interest in your career and who guided or sponsored you. Nearly as many of these executives (61.6 percent) had served in mentoring capacity themselves. America and Anderson [1] found that 53 percent of 1,050 female corporate officers surveyed reported having had mentor/protege relationship. The evidence suggests that mentor-protege relationships are common labor market phenomenon, at least in certain occupational classifications. Roche found that initial attachment to mentor generally occurs during the first five years of an individual's career. However, since respondents who reported having such relationship averaged 2 mentors, he noted considerable attachment to mentors during the proteges' 6th-10th years of career. Most respondents reported that their mentors exerted substantial influence on their career. Those executives who had mentor averaged 47.3 years in age and $118,900 in salary, whereas executives who did not have mentor averaged 49.2 years in age and $114,200 in salary. Finally, Roche noted that 50 percent of executives who had mentor reported being

Specific Capital, Adverse Selection, and Turnover: A Comparison of the United States and Japan

I construct a model of the labor market which combines adverse selection of workers′ abilities and moral hazard for improving workers′ firm-specific productivities. The model has multiple equilibria under certain parameter values. I argue that one of these equilibria corresponds more closely to the American labor market and the other corresponds to the Japanese labor market. The model is consistent with the following stylized facts: (1) labor mobility is lower in Japan than in the United States, (2) outside option values for Japanese workers in mid-career are low, and (3) firm-specific human capital investment is intensive in Japan. J. Japan. Int. Econ., September 1994, 8(3), pp. 272–292. Faculty of Economics, Nagoya City University, Mizuho-Cho, Mizuho-ku, Nagoya 467, Japan.

FIRM SPECIFIC HUMAN CAPITAL AS AN EMPLOYER DISCIPLINE DEVICE

The inability of employers to monitor perfectly the level of effort of their employees is a potentially serious impediment to labor market efficacy. Indeed, a number of recent studies have concluded that this may lead to involuntary unemployment (Shapiro and Stiglitz [1984], Sparks [1986]); an inefficient sectoral allocation of workers (Oi [1990], Strand [1986]); and discrimination against productively identical workers (Bulow and Summers [1986]). This paper shows that the lock-in effect of firm-specific human capital can help alleviate problems of worker moral hazard and thereby promote labor market performance. I. INTRODUCTION As the surveys of Akerlof & Yellen [1986, Ch. 1], Carmichael [1990], Lang and Kahn [1990], and Weiss [1990] amply illustrate, the last decade witnessed the emergence of a large body of literature which falls under the general rubric of wage models of the labor market. The hallmark of this approach is that some essential aspect of worker performance depends upon the wage paid by the firm. Much recent work--Bulow & Summers [1986], Oi [1990], Shapiro and Stiglitz [1984], Sparks [1986], and Strand [1986]-- has considered the case in which (due to monitoring difficulties) worker effort depends (positively) upon the wage. The popularity of the approach undoubtedly stems from its ability to apparently explain many stylized features of labor market behavior in an attractively simple and straightforward manner. In the papers cited above, Shapiro and Stiglitz [1984] and Sparks [1987] show that labor market equilibrium can be characterized by involuntary unemployment; Bulow and Summers [1986] demonstrate that, inter alia, efficiency wage models are consistent with equilibrium discrimination against productively identical agents; and finally, Oi [1990] and Strand [1986] show that efficiency wage payments can generate an inefficient sectoral allocation of workers. Yet, recent research now suggests that the results obtained from this class of model are highly sensitive to the specific assumptions made at the outset about the completeness of contractual arrangements. Indeed, as Carmichael [1985] astutely observed, if contracts can include bond payments (even if financed by borrowing from imperfect capital markets), the standard imperfect-monitoring variant of the efficiency wage hypothesis fails to predict the emergence of equilibrium involuntary unemployment (i.e., all workers receive their reservation utility). However, proponents of efficiency wage models have responded to this criticism by arguing that workers would be unwilling to post large bonds with firms due to a problem of employer moral hazard. Specifically, workers recognize that firms may hire them in order to steal their bond payment ex post. Once this limitation on admissible bond payments is recognized, it might then be tempting to conclude that the main results of the efficiency wage literature will re-emerge. In this paper I consider this issue, in an environment which also allows for investment in firm-specific human capital (the basic structure is similar to Hashimoto [1981]). Following Macleod and Malcomson [1987; 1989], I assume that: (1) worker performance measures are sufficiently nebulous to preclude verification by third parties and (2) as in Carmichael [1983], the courts are unable to ascertain whether, in the event of separation, a worker quit or was fired. This informational structure generates a potentially serious joint worker-employer moral hazard problem: workers may shirk and employers may simply hire labor in order to collect any bond payments or exit fees stipulated in the contract. As emphasized by both Carmichael [1989; 1990] and Macleod and Malcomson [1987; 1989], the solution to this contracting problem requires that both parties receive a non-negative return from the continuation of the match (relative to what can be obtained from its dissolution). …

Sex Differences in Tenure Profiles: Effects of Shared Firm-Specific Investment

This article employs a model of Masanori Hashimoto with extensions by Donald Parsons to analyze variation in tenure by sex, age, and firm type. Fixed-wage contracts eliminate postcontractual opportunism associated with firm-specific human capital investment. However, such contracts result in inefficient quits and terminations. Calibration of the sharing of this investment between workers and employers minimizes the costs of these inefficient separations. Moreover, this optimal sharing rate varies systematically with the characteristics listed above. These tenure-slope implications are tested with favorable results.

Wage differentials and asymmetric mobility

We explore whether a priority given to a husband's career within a family could partly explain the gender wage gap. We show that restrictions preventing women from pursuing job opportunities, regardless of location, are likely to depress women's relative pay more than will restrictions requiring women to place a high value on non-pecuniary aspects of jobs. However, neither restriction is likely to have a large effect in the absence of interaction with investment in firm-specific human capital. The effects of such restrictions on wage differentials are likely to be large enough that empirical studies which do not examine wages, human capital investment and job search in a simultaneous equations framework could produce results which are seriously biased.