Relational Knoweldge Transfers

Luis Garicano (London School of Economics, United Kingdom)

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.
(Joint with Luis Rayo)

On the Role of Pre-Determined Rules for HRM Policies

Silvia Dominguez Martinez (University of Amsterdam)

An important question in almost any organization is to what extent decisions on the career paths of employees should be based on pre-determined rules or should be left to the discretion of managers. We consider an environment where the manager but not the employee learns the employee’s ability. The manager’s decision may affect the employees’ self-image and thereby their motivation, and may affect the employees’ incentive to invest in training. We show that if self-image concerns dominate, the manager is too reluctant to dismiss less competent employees, implying that she would benefit from strict rules governing retention decisions. On the other hand, if training is sufficiently important, the payoff maximizing rule for the manager is to be strict with employees who did not invest and lenient towards employees who did invest. Generally, organizations benefit from committing to rules. Some degree of managerial discretion is beneficial when rules can only be applied on the basis of noisy measures of employee ability.
(Joint with Josse Delfgaauw and Otto H. Swank)