Wage contracts and specific human capital investment under uncertaint

In Essay 1, an equilibrium model of labor contracts under asymmetric information is developed. A profit-maximizing firm offers a wage but retains the right to lay off the worker based on its private observation of the worker's productivity ex post. The worker invests in specific human capital, un-observable to the firm, to improve the retention probability. It is shown that productivity uncertainty has adverse effects on the firm's wage offer to the worker, the worker's investment in firm-specific human capital, employment stability, and average productivity. A comparison between American and Japanese firms is made to explore the implication of the finding.;In Essay 2, the basic model in Essay 1 is extended to a two-period model to study the property of wage profiles. The one-period interaction between the firm and the worker discussed in Essay 1 is repeated twice. The existence of the second period affects the decisions of the firm and the worker in the first period by creating an option value. The principle results are that in equilibrium the second period wage is higher than the first period wage, and the worker invests less when there is higher productivity uncertainty.;In Essay 3, empirical study is carried out to compare labor productivity uncertainty between Japan and the US. It is found that labor productivity uncertainty is lower in Japan than in the US, which together with the theoretical results shown in Essay 1 explain the difference in the turn-over rate between the two economies. The relationship between separation rates and productivity uncertainties across industries is examined to test the generality of the theoretical result. The finding is positive.