Working Paper: CEPR ID: DP1719
Authors: Marcus Miller; Roberto Ippolito; Lei Zhang
Abstract: Producing high technology output and supplying sophisticated services often involves costly investment in industry-specific skills. But the threat of poaching means that it is the individual ?stakeholder?, not the firm, who must bear the cost. We investigate various mechanisms for funding human capital investment in an industry equilibrium framework where capital market imperfections would (in the absence of intervention) result in underinvestment. The main result is that government provision of loan guarantees (conditional on no-bankruptcy) leads to wage hikes which (by forcing exit of some firms thus increasing monopoly power) raise profits in a socially inefficient manner: income contingent loans and levy subsidy schemes, meanwhile, can result in a socially efficient outcome.
Keywords: industry-specific skill; industry equilibrium; credit constraint; irreversible investment; stakeholder
JEL Codes: D41; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government provision of loan guarantees conditional on no bankruptcy (H81) | Wage increases (J31) |
| Wage increases (J31) | Firms exit the market (L19) |
| Firms exit the market (L19) | Increased monopoly power (D42) |
| Increased monopoly power (D42) | Raising profits in a socially inefficient manner (D61) |
| Income contingent loans (H81) | Socially efficient outcomes (D61) |
| Levy subsidy schemes (H23) | Socially efficient outcomes (D61) |