Toward a theory of firms' training and development behavior under externality: A game theoretic analysis and experimental evidence.

Abstract

This dissertation presents a new approach to one of the classic problems in economics: firms' training and development (T&D hereafter) behavior under externality. Its objective is threefold. The first objective is to identify the conditions under which T&D externalities are present in the labor market; the second is to examine firms' strategic T&D behavior under T&D externality; the third is to provide a possible institutional remedy for the less than socially optimal level of firms' T&D investments that T&D externalities generate. The most important findings of this research are that the labor market in general cannot fully internalize T&D externalities in a world of imperfect information. In the presence of T&D externalities, firms' training investments are socially sub-optimal. In a dynamic game environment, one firm's T&D decision depends on the magnitude of T&D externalities, as well as on the level of training provided by the other firms. Under certain conditions, a firm may invest zero in T&D, pirating skilled workers from the other firm. One firm's T&D investment is inversely related to its own discount rate, but positively related to its competitors' discount rates. In addition, a T&D externality reduces firms' T&D incentive not only at the firm that generates the T&D externality, but also at the firm that receives the T&D externality. More importantly, it is shown that market structure per se affects firms' T&D investment behavior. The level of firms' T&D investments is inversely related to the competitiveness of the output market. In terms of social optimality of T&D, monopoly market organization is superior to perfect competition. The results are hence consistent with Schumpeter's (1943) dynamic efficiency arguments. Finally, it is shown that joint T&D programs can serve as a possible remedy to correct T&D externalities, and joint T&D programs, as impure public goods, can be provided efficiently on a voluntary basis under certain conditions. A game theoretic model of the public goods provision with positive Nash equilibria is presented and experimental evidence which supports the hypothesis is provided.