Matching and competition for human capital

A simple model of discretionary worker investment in human capital is developed in which worker productivity is affected by a firm-specific match and employers bid strategically for workers. The labor market returns a share of specific capital productivity to workers without Nash bargaining power and without recourse to long-term contracts, because efficient turnover transforms a worker's former employers into her outside options. When the cost of specific investment falls, wage profiles become less steep and turnover is reduced. Perversely, an increase in the probability of turnover increases the (privately) optimal investment in specific capital. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: J24; J31.