A BEJEAP Contributions article.

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.

Submitted: June 23, 2001 · Accepted: July 23, 2002 · Published: July 25, 2002

Originally published in Contributions to Economic Analysis & Policy.

Recommended Citation

Hermalin, Benjamin E. (2002) "Adverse Selection, Short-Term Contracting, and the Underprovision of On-the-Job Training," Contributions to Economic Analysis & Policy: Vol. 1 : Iss. 1, Article 5.
Available at: http://www.bepress.com/bejeap/contributions/vol1/iss1/art5