This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. September 2017
  5. Relational Knowledge Transfers

Relational Knowledge Transfers

Download Full Text PDF

Abstract

We study how relational contracts mitigate Becker's classic problem of providing general human capital when training contracts are incomplete. The firm's profit-maximizing agreement is a multiperiod apprenticeship in which the novice is trained gradually over time and eventually receives all knowledge. The firm adopts a 1/e rule, whereby at the beginning of the relationship the novice is trained, for free, just enough to produce a fraction 1/e of the efficient output. After that, the novice earns all additional knowledge with labor. This rule causes inefficiently lengthy relationships that grow longer the more patient the players. A minimum wage is welfare enhancing.

Citation

Garicano, Luis, and Luis Rayo. 2017. "Relational Knowledge Transfers." American Economic Review, 107 (9): 2695-2730. DOI: 10.1257/aer.20160194

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • D86 Economics of Contract: Theory
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
  • M53 Personnel Economics: Training