Trading off static efficiency and dynamic incentives in apprenticeship relations
In this paper, we study a model of on-the-job training in a monopsonic environment with no enforceability and with imperfect credit markets. A market equilibrium is a relational contract which specifies a sequence of wages, a sequence of productivities for the worker and a termination date which satisfy the worker's and the firm's incentive constraint and maximize profits. We show that no self-enforceable contract can end in a period in which total surplus from employment is negative. If the surplus of employment is always positive, equilibrium contracts are perpetual and involve no wage payment before the worker is fully trained. The worker's expected productivity in an alternative employment grows exactly at the interest rate. For the particular case of a Cobb-Douglas production function for the agent, we show that training is slower for higher productivity coefficient and output elasticity. The effect of the discount rate is ambiguous.