Research Summary
Research Summary
Manager Specific Human Capital Investment: A Model of Block Trading and Firm Stability
Description
I develop a model in which workers can undertake specific human capital investments in the firm and in the manager employed by the firm. If the manager leaves the firm, a worker has to decide whether to join her in the new firm or stay in the old firm. In case of managerial turnover the worker will be able to productively employ only one type of her human capital; the other serves as an outside option when bargaining with the firm she decides to work for. Using this dynamic I am able to generate new testable predictions on workers' wage and productivity changes as a function of managerial turnover. I can also derive results on turnover and firm stability as a function of team size and manager tenure. For example, I show that managerial turnover can cause a decrease in workers' productivity and an increase their compensation; that exogenously increasing the probability of managerial turnover may motivate workers' to invest more in specific human capital and that increasing the probability may be welfare improving even if turnover itself is not. I also predict that workers in firms with larger teams and managers with higher tenure experience smaller wage changes after managerial turnover.