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Article
Adverse Selection, Short-Term Contracting, and the Underprovision of On-the-Job Training
The B.E. Journal of Economic Analysis & Policy (2006)
  • Benjamin E. Hermalin
Abstract

This article argues that the existence of adverse selection (worker heterogeneity) can explain the underprovision of general training by employers. High-ability workers value the option to entertain outside wage offers once their abilty becomes known to the market. Offering short-term contracts is, therefore, a way to screen high-ability types from low-ability types. A firm is not willing to train workers under short-term contracts. Hence, despite the positive returns to training, training may be underprovided in equilibrium. More generally, this article contributes to the literature that seeks to explain the puzzling phenomenon of short-term contracts governing long-term buyer-seller relationships.

Keywords
  • contract length,
  • provision of training
Publication Date
December, 2006
Citation Information
Benjamin E. Hermalin. "Adverse Selection, Short-Term Contracting, and the Underprovision of On-the-Job Training" The B.E. Journal of Economic Analysis & Policy Vol. 1 Iss. 1 (2006)
Available at: http://works.bepress.com/hermalin/1/