Matching and competition for human capital

A simple model of discretionary worker investment in human capital is developed in which worker productivity is affected by a firm-specific match and employers bid strategically for workers. The labor market returns a share of specific capital productivity to workers without Nash bargaining power and without recourse to long-term contracts, because efficient turnover transforms a worker’s former employers into her outside options. When the cost of specific investment falls, wage profiles become less steep and turnover is Ž . reduced. Perversely, an increase in the probability of turnover increases the privately optimal investment in specific capital. q 2000 Elsevier Science B.V. All rights reserved. JEL classification: J24; J31