Design of firm‐specific training in an agency relationship: Who should take the initiative?

Abstract

This paper considers the twofold problem of compensation contracting and the design of a human capital investment scheme. Before contracting, the principal and the agent can engage in a joint stochastic production process of exerting effort to raise the agent s productivity in the firm. The principal can employ synchronous effort exertion, or either actor can assume a leadership role. We determine which organizational design is best for the principal at the endogenously optimal compensation contract, depending on how the efforts interact.