Intergenerational Externalities

A common theme which runs through much of the investment literature is that private incentives may lead to sub-optimal levels of investment activity. The idea has been extended casually to consideration of human capital investment as well. It is sometimes contended that decisions, made by parents, have adverse effects on their offspring, which could be prevented if inter-generational contracts could be struck. If so, a case can be made for government intervention or subsidization programs to alleviate these intergenerational externalities. Specifically, the sub-optimal investment in offspring human capital may take such obvious forms as poor clothing, too little health care, or too few resources devoted to the child's education. Less obvious externalities may result when parents underinvest in themselves because they fail to consider spillover benefits to their children. Parental schooling, for example, may affect the child's ability (or desire) to learn. Dietary patterns established by parents for themselves may influence the child's eating habits and affect his health. More directly, healthy parents are less likely to transmit diseases to their offspring. This paper will examine the effects of these intergenerational externalities in greater detail.

Raids and Imitation

Many job changes occur without intervening spells of unemployment.A model is constructed in an attempt to understand this phenomenon. It implies that the best workers are hired away first because, with imperfect information, prices do not fully adjust for quality. Thus, there develops stigma associated with failing to receive outside offers. The force of the stigma,which affects wages, depends upon the likelihood of discovering a worker's ability, the size of the market, and the speed of diffusion of information. In some occupations, it implies that there quickly develop pronounced differ-ences in the treatment of raided and unraided workers. A consequenceis a theory of occupational wage dispersion. The Peter Principle-—that workers are promoted to a level of incompetence-is a direct implication.The model can be applied to product markets as well to explain the relationship between price and time on the shelf.

Incentive Effects of Pensions

Many different types of pension plans exist in American firms. The stipulations of plans vary dramatically, even among large firms, with respect to vesting, relationship of the pension to final salary, maximum and minimum years of service constraints, and maximum and minimum benefit levels. These provisions are examined to determine their effects on worker behavior.Specifically, the paper analyes which plans encourage or discourage appropriate worker responses in hours worked, turnover, human capital investment and effort. An attempt is made to explain the provisions in light of the findings.

Incentives and Wage Rigidity

With the growth of the literature on incentive compensation has come the belief by some that incentive pay may be less rigid than pay that is not designed to effect incentives. Some have gone so far as to argue that this may explain differences in unemployment rates across countries. it is shown that there is no direct link between incentives and wage rigidity. Many compensation schemes that provide incentives have the reverse effect: That is, they tend to make wages more rigid than would be the case were incentives not an issue atall. This paper explores the relationship between wage rigidity and the provision of incentives in a variety of circumstances.

Incentive Contracts

Labor relations involve incentive problems. The market solves these problems by developing a variety of institutions. This paper describes and assesses the various forms of incentive contracts.

Firm-Specific Human Capital: A Skill-Weights Approach

One problem with the theory of firm-specific human capital is that it is difficult to generate convincing examples of investment that could generate the sometimes observed large and continuing effects on earnings. Another approach, called the skill-weights' view, allows all skills to be general in that there are other firms that use each of the skills. But firms use them in different combinations and with different weights attached to them. The skill-weights view not only has aesthetic appeal, but is consistent with the frequently observed large tenure effects. All of the implications of the traditional view are produced by this approach, and there are a number of other implications that distinguish the new view from the traditional one. The empirical evidence already contains some support for the skill-weights view.

Family Background and Optimal Schooling Decision

In this paper, another aspect of optimizing behavior is considered. Specifically, it asks whether variations in levels of attained schooling across groups can be explained by a model that assumes that capital markets are perfect and that individuals maximize wealth. The logic of the analysis proceeds as follows: First, a model is constructed that allows estimation of costs and returns to education for each individual, based on the assumption that all individuals face the same borrowing rates. Given costs and returns, one can obtain an optimal wealth-maximizing level of education for each individual. Differences between actually acquired and wealth-maximizing levels of education can then be calculated, and one can determine whether or not the residuals are systematically related to background variables. If, for example, low-income individuals have a consistently larger estimated wealth-maximizing level of education than actual level, one could conclude either that returns to schooling differed between groups or that capital market differences exist. The model allows these two explanations to be distinguished. Since differential returns are caused by wage differences across groups, the wealth-maximizing level can take these labor market variations into account. Any residual variation will be due to factors other than differential wage rates, presumably capital cost differences .