Abstract

In this paper I analyse contracts which motivate workers to invest in on-the-job "general" training in a context of strategic bargaining and labour market imperfections (e.g., turnover, search and switching costs). While the "hold-up" literature mainly restricted attention to investments that benefit only the investor ("self-investments"), worker's "general" human capital is not a self-investment since it increases firm's revenue. For general self-investments Malcomson (1997, 1999) showed that a proper fixed wage contract assures the efficient level by workers. Instead, I show in this paper that for on-the-job general training (cooperative general investments) by workers a fixed wage contract "à la" Malcomson cannot obtain the "first-best" level of investment since the worker does not receive any return when the contract is not renegotiated. Following such a result, I pass to analyse a more complex contract which imposes a (breach) penalty to a party in case of permanent separation. Such a contract can assure the first-best level of general training by worker when marginal increases of worker's outside option and productivity inside the firm produced by the investment are the same and courts are able to enforce every contractual penalties.