School of Economics and Finance

No. 418: Investment in General Training with Consensual Layoffs

Giulio Fella , Queen Mary, University of London

July 8, 2014

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We study non-contractible firms' investment in general training in a model of frictional unemployment. Since training is vested in workers, firms' return to training is zero when a match ends. Consensual layoff provisions or large severance payments oblige firms to bargain efficiently over the joint payoff from separation. This increases employers' incentives to train as they share workers' outside return to general human capital. The result generalizes to all types of general investment that are vested in the non-investing party on separation. We also show that, independently from underinvestment in training, the laissez-faire equilibrium is always inefficient for any given level of investment.

J.E.L classification codes: J24, J63, J65

Keywords:Consensual layoffs, General training, Matching