Abstract

Investments in general human capital paid by workers might be prevented by the risk of firm's opportunistic behaviour: because of the non verifiability of training activities, the firm might employ the workers who accept a wage cut in normal production activities and provide them with a low level of training. In this paper, it is shown that in labour markets with search and matching frictions, the solution to the firm's moral hazard problem depends on labour market conditions. On the basis of an "up-or-out" contract, a "no-cheating constraint" is optained which shows that firm's opportunism might be prevented in tight labour markets. On the other hand, in markets characterized by high unemployment this type of contract is unable to guarantee the realisation of workers' desired investments. Secondly, we show that when the "endogenous" market solution is not feasible, firing costs may play a positive role in encouraging human capital investments. The analysis allows us to provide an explanation of some norms, which regulate the Italian fixed-term Training Contracts (Contratti di Formazione e Lavoro), requiring the firm to transform a given percentage of these contracts in permanent employment contracts.