Investment in Human Capital Under Endogenous Asymmetric Information

Heski Bar-Isaac (University of Toronto)
Clare Leaver (University of Oxford)

Abstract : When is general training under-provided? We study this classic question in a model of a competitive labour market. Workers vary in firm-specific and general skills. Firms’ choices of information disclosure play a key role. Disclosing general human capital information on bad matches, but revealing nothing about good matches, leads to an efficient allocation of workers. This also creates adverse selection that enables workers to pay for efficient training. This information structure resembles the outplacement support commonly found in professional services firms. Moreover, it implies that wages of released workers can be higher than wages of those who are retained.

Optimal Feedback in Contests

Jeffrey Ely (Northwestern University)
George Georgiadis (Northwestern University)
Sina Khorasani (UCSD)
Luis Rayo (Northwestern University)

Abstract : We derive optimal contests for environments where output takes the form of breakthroughs and the principal has an informational advantage over the contestants. Whether or not the principal is able to provide real-time feedback to contestants, the optimal prize allocation is egalitarian: all agents who have succeeded in a pre-specified time interval share the prize equally. When providing feedback is feasible, the optimal contest takes a stark cyclical form: contestants are fully apprised of their own success, and at the end of each fixed-length cycle, they are informed about peer success as well.

Transparency and Innovation in Organizations

Kimiyuki Morita (Senshu University )
Takeharu Sogo (SKEMA Business School)
Osamu Hayashida (Osaka School of Economics)

Abstract : In each period of our two-period principal-agent model, the agent adopts either a new or known idea and exerts implementation effort. The output depends on both effort and the quality of the adopted idea. While exerting effort, the agent can acquire know-how that is partially wasted upon changing ideas between the two periods. The principal decides whether to make the organization transparent or opaque, i.e., whether interim performance measures are observable or not to both parties. We show that transparency facilitates innovation, but may reduce the final output if the project requires more effort rather than quality idea. Counterintuitively, transparency can reduce the expected final output even more if the acquired know-how becomes less idea-specific or if the interim performance measure becomes more precise.