Information, Screening and Human Capital.

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    • Abstract:
      Given the large and growing body of research into the nature and extent of human investment decisions, it is somewhat surprising that until the recent work of economists Michael Spence and Joseph Stiglitz there has been little discussion of the information transmission process. Certainly in all the theoretical modeling of human capital accumulation it has been implicitly assumed that throughout the life cycle employers are aware of each individual's marginal value product. That is, traditional human capital theory has included the assumption that information costs are negligible. However, it is by no means clear that a firm can evaluate cheaply the productivity of an individual worker, especially when the nature of the job is nonspecific. Plausibly information about an individual's value often unfolds only slowly with time on the job. Plausibly also, the costs associated with placing an individual in a job for which he is ill-suited are far from negligible. If so, firms have a strong incentive to offer salary contracts in which earnings are contingent upon long-run performance.