Economic growth and the riskiness of investment in firm-specific skills

This paper develops a simple growth model in which workers face risks to their firm specific skills, such as far-reaching changes in business and transaction styles or drastic technological innovations, and invest in general skills to prepare for these risks. This model demonstrates that, in the presence of the economy-wide positive externality of general skills, workers' investment in general skills exhibits a strategic complement, and thus, a low-growth trap may arise. Since a lower risk to firm-specific skills decreases workers' incentive to invest in general skills, multiple equilibria possibilities and the amount of government subsidies for general skill investment that are required to remove the bad equilibrium increase. (c) 2003 Elsevier B.V. All rights reserved.