Working Paper: CEPR ID: DP9460
Authors: Luis Garicano; Luis Rayo
Abstract: An expert must train a novice. The novice initially has no cash, so he can only pay the expert with the accumulated surplus from his production. At any time, the novice can leave the relationship with his acquired knowledge and produce on his own. The sole reason he does not is the prospect of learning in future periods. The profit-maximizing relationship is structured as an apprenticeship, in which all production generated during training is used to compensate the expert. Knowledge transfer takes a simple form. In the first period, the expert gifts the novice a positive level of knowledge, which is independent of the players' discount rate. After that, the novice's total value of knowledge grows at the players' discount rate until all knowledge has been transferred. The inefficiencies that arise from this contract are caused by the expert's artificially slowing down the rate of knowledge transfer rather than by her reducing the total amount of knowledge eventually transferred. We show that these inefficiencies are larger the more patient the players are. Finally, we study the impact of knowledge externalities across players.
Keywords: General; Human Capital; Knowledge; Relational Contracts; Skills
JEL Codes: C73; J24; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal relational contract (D86) | knowledge transfer occurs in structured apprenticeship format (J24) |
| expert gifts novice positive level of knowledge (D83) | knowledge grows at players' discount rate (D80) |
| inefficiencies arise from expert artificially slowing down knowledge transfer (D83) | rate of knowledge transfer decreases (O36) |
| players' patience increases (Z22) | inefficiency of knowledge transfer increases (D89) |
| knowledge externalities influence rate of knowledge transfer (O36) | positive externalities speed up process (O36) |
| knowledge externalities influence rate of knowledge transfer (O36) | negative externalities slow down process (D62) |
| optimal contract structure leads to slower rate of knowledge transfer (D86) | discount factor increases (E43) |