Career Concerns and the Acquisition of Firm-Specific Skills

This paper studies compensation schemes that can motivate a worker to acquire nonverifiable firm-specific skills, when the acquisition process is also one of learning about managerial talent. At the beginning of the employment relationship, the worker encounters opportunities to enhance her specific human capital. Greater skills may increase the chances of being promoted; but as more opportunities are taken, more is learned about the worker's talent, and someone displaying low talent is sure not to be promoted. In this context we show that first-best firm-specific skills collection can be implemented with a scheme that combines discretionary promotions, an appropriate wage schedule and subsidies of training at the margin.