QUITS, LAYOFFS AND CONTRACTS ON SHARING INVESTMENTS IN SPECIFIC HUMAN-CAPITAL

When the worker is risk averse and has no access to capital markets then the sharing of specific human capital investments with the firm is complicated by considerations for consumption smoothing and productive efficiency. Sharing is no longer solely determined by the fact that one party can inflict a capital loss on the other unilaterally separating. Using a contract framework this paper shows that restricting the right to separate to either the worker or the firm does not necessarily result in that party taking full responsibility of the investments. Whether no sharing remains optimal in such cases will depend on the relative magnitude of the worker's subjective discount rate and the market discount rate for investments. © 1990.