Redundancy Payments and Firm-Specific Training: A Comment

A. Booth and M. Chatterji (1989) show that, with firm-specific human capital, workers bear a part of the training costs and consequently receive positive redundancy payments if dismissed. Such contracts are proven to yield negative profits and, hence, are not viable. The correct contracts require the firm to pay the second-period workers their expected productivity. With positive redundancy payments, workers not only bear the entire costs of training, but also cross-subsidize those who are laid off in the second period. The standard cost-sharing result does not hold in their model. Copyright 1991 by The London School of Economics and Political Science.