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Choosing between Up-or-Out and Spot Contracts: Human Capital Investment versus Job-Matching Considerations

Author

Listed:
  • Chun Chang

    (Finance Department, Carlson School of Management, University of Minnesota)

  • Yijiang Wang

    (Industrial Relations Center, Carlson School of Management, University of Minnesota)

Abstract

Up-or-out contracts can improve human capital investment incentives but lead to suboptimal worker-employer separation. When job matching uncertainty is large relative to the return to human capital investment, spot contracts Pareto dominate up-or-out contracts. Otherwise, up-or-out contracts are more efficient. This view seems consistent with contractual choices in many different situations including those for university appointments with different emphases on research and teaching. The model also shows that human capital investment can be positively correlated with turnover under the up-or-out contract, a prediction different from that of the traditional human capital theory but consistent with casual observations of university professors' experiences. The result shows that the relationship between human capital investment and labor turnover should be understood in the context of a chosen contractual form.

Suggested Citation

  • Chun Chang & Yijiang Wang, 2000. "Choosing between Up-or-Out and Spot Contracts: Human Capital Investment versus Job-Matching Considerations," Annals of Economics and Finance, Society for AEF, vol. 1(1), pages 189-210, May.
    • Handle: RePEc:cuf:journl:y:2000:v:1:i:1:p:189-210
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    Citations

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    Cited by:

    1. Ping Yan, 2011. "Optimal Unemployment Insurance with Endogenous Search Effort," Annals of Economics and Finance, Society for AEF, vol. 12(2), pages 347-369, November.

    More about this item

    Keywords

    Contract; Human capital; Labor;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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