FIRM SPECIFIC HUMAN-CAPITAL AS AN EMPLOYER DISCIPLINE DEVICE

The inability of employers to monitor perfectly the level of effort of their employees is a potentially serious impediment to labor market e fficacy. Indeed, a number of recent studies have concluded that this m ay lead to involuntary unemployment (Shapiro and Stiglitz [1984], Spar ks [1986]); an inefficient sectoral allocation of workers (Oi [1990], Strand [1986]); and discrimination against productively identical work ers (Bulow and Summers [1986]). This paper shows that the lock-in effe ct of firm-specific human capital can help alleviate problems of worke r moral hazard and thereby promote labor market performance.