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  3. American Economic Review
  4. September 2017
  5. Relational Knowledge Transfers

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Relational Knowledge Transfers

  • Luis Garicano
  • Luis Rayo
American Economic Review
vol. 107, no. 9, September 2017
(pp. 2695–2730)
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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