Endogenous On-The-Job Training With Moral Hazard

by Ekkehart Schlicht

Labour Economics, 3(1), 1996, 81-92.

Abstract

A firm may vary the amount and quality of on-the-job training that it offers to its trainees. Under full information, the firm will just offer the socially optimal amount of training, taking also into account productivity gains in other occupations.
If the trainee can form an opinion about the amount of on-the-job training only after training is completed, this creates a possibility for the firm to offer less training and make extra profit. This moral hazard problem may be solved if the firm that offer good training reaps a continuous flow of extra profits, but such a solution is not always maintainable. 'Vocational training standards or layoff restrictions, as well as other institutional features, may emerge as institutional solutions to this problem.

Keywords: Training, Wages, Human capital, Moral hazard

Journal of Economic Literature classification numbers: J24, J31

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