General training in labor markets: Common value auctions with unobservable investment

• Employer financing for the general training of workers is an important puzzle.
• A theory based on common value auctions with asymmetric information is presented.
• One bidder makes an unobservable investment in the item before the auction.
• An employer creates endogenous adverse selection by randomizing the training level.
• The model generates wage and training dispersion among ex ante identical workers.

This paper studies the puzzle of employer financing for the general training of workers. A parsimonious theory is developed based on asymmetric information between employers about the quantity of training. The labor market is modeled as a common value auction with an informed and an uninformed bidder. The novel feature of the game is that one of the bidders can make an unobservable investment that increases the value of the item before the auction. By randomizing the amount of training provided, an employer can create an endogenous adverse selection problem, enabling it to compress the wage structure and capture some returns from its training investment. The model generates continuous equilibrium wage and training distributions, and identical employees can receive different wage offers and training levels. A parametric example is used to illustrate how the shape of the wage distribution depends on the elasticity of production with respect to human capital.