Learnability Confidence and Human Capital Acquisition

Abstract: This paper examines the effect of heterogenous prior beliefs regarding learnability on incentives for human capital acquisition. To do so, I consider a repeated moral hazard problem in which a principal hires an agent for two periods, who then implements an identical project in each period and he obtains the opportunity to develop his ability. They openly disagree and have differing prior beliefs on the success probability of the ability development. The agent’s belief regarding learnability have two effects: (i) it increases his incentive to work and develop his ability after failure; but (ii) in the first period, it countervails the incentive to avoid failure. The principal’s belief regrading learnability determines the optimal level of learnability confidence. If the principal has low learnability confidence, then the latter effect dominates the former effect, and hence the principal prefers the agent with low learnability confidence. My results predict that why some organizations focus on the human resource development.