Abstract: When human capital skills differ in their ability to attract offers from alternative employers, a potential inefficiency in human capital investment arises. If a worker's output is observed by the labour market only when the worker invests in self-promoting activities, then high-ability workers overinvest in self-promotion. No bond is posted in the contract that both attains efficient investment and minimizes the bond subject to individual rationality constraints and the zero profit condition. The contract is one in which the firm (i) offers to match outside offers strategically and (ii) guarantees a minimum wage. The model predicts that, under both the spot market contract and the efficient contract, wage declines with seniority even when conditioning on high ability. This prediction is consistent with the stylized fact regarding the decline of wages with seniority in academia. The model can also explain how the seniority wage premium may vary across disciplines, time, and schools.
Keywords: negative seniority wage premium, spot market contract, efficient contract, general human capital
JEL Classification: C7;C72;L1