Anke S. Kessler

The Theory of Human Capital Revisited: On the Interaction of General and Specific Investments

Human capital theory distinguishes between training in general-usage and firm-specific skills. In his seminal work, Becker (1964) argues that employers will not be willing to invest in general training when labour markets are competitive. However, they are willing to invest in specific training because it cannot be transferred to outside firms. The paper reconsiders Beckers theory. We show that there exists an incentive complementarity between employer-sponsored general and specific investments: the possibility to provide specific training leads the employer to invest in general human capital. Conversely, the latter reduces the hold-up problem that arises with respect to the provision of firm-specific training. These findings hold even if there is no technological link between the two types of training. We also consider the virtues of long-term contracting and discuss some empirical observations that could be explained by the model.

The Value of Ignorance

This article provides a new perspective on the information structure of an agent in a standard model of adverse selection. Before the contracting takes place, the agent has the opportunity to gather (private) information on a relevant parameter that affects final payoffs. I allow for the possibility that the agent remains uninformed with some probability. The agents optimal choice of information structure is derived, and it is shown that in the case of two states of nature, the possibility of remaining ignorant has a positive strategic value for the agent. Since a poor information structure generates strategic benefits, there will be no equilibrium in which the agent is perfectly informed even if additional information is costless at the margin.

On Monitoring and Collusion in Hierarchies

Abstract This paper studies a stylized three-layer agency framework in which a principal hires a supervisor to monitor an agents productive effort. It is demonstrated that the possibility of collusion imposes no additional cost on the principal if the supervisors report is “hard” information, i.e., monitoring evidence can only be concealed and not forged. This result holds irrespective of the nature of the penalty that can be imposed on the agent. The findings suggest that it is strictly better for the principal to monitor the agents action rather than to audit the agents private information. Journal of Economic Literature Classification Numbers: D82, L23.

Communication in Federal Politics: Universalism, Policy Uniformity, and the Optimal Allocation of Fiscal Authority

The paper presents a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy-relevant information. Depending on the type of policy under consideration, communication between delegates generally suffers from a bias that makes truthful communication difficult and sometimes impossible. This generates inefficient federal policy choices that are often endogenously characterized by overspending, universalism, and uniformity. Building on these findings, I develop a theory of fiscal (de-)centralization, which revisits the work of Oates in a world of incomplete information and strategic communication. Empirical results from a cross section of US municipalities are consistent with the predicted pattern of spending.

Economic versus political symmetry and the welfare concern with market integration and tax competition

Abstract The paper studies the implications of increased capital market integration and the associated increased tax competition for world welfare. We consider a population with heterogeneous endowments of capital in a model of redistributive politics. We show that if countries have the same average capital endowments but differ with respect to the endowments of their decisive majority, autarky may be socially preferred to integration under any aversion to inequality. We then reverse the conclusion by assuming that the decisive majority has the same endowment but countries differ in their average capital endowments. In proving these results we show that integration may decrease world output and increase the utility of the poorest members of the economy.

Monitoring and Productive Efficiency in Public and Private Firms

The paper compares productive efficiency in public and private firms. We study a principal-agent model in which the firms manager is privately informed about a cost parameter and exerts unobservable cost reducing effort, while the owner can conduct costly audits to obtain information about the firms cost. Without auditing, managerial effort (and therefore production efficiency) is strictly higher under public governance with a benevolent government. However, if auditing is possible, a profit-maximizing private owner always audits at least as frequently as a public principal. For small auditing costs, we find that monitoring decisions, managerial effort and welfare under both governance structures coincide. Conversely, when audits becomes more expensive, the public (but not the private) owner refrains from monitoring, and the private firm may produce more cost efficiently.