SPECIFIC CAPITAL, ADVERSE SELECTION, AND TURNOVER - A COMPARISON OF THE UNITED-STATES AND JAPAN

I construct a model of the labor market which combines adverse selection of workers' abilities and moral hazard for improving workers' firm-specific productivities. The model has multiple equilibria under certain parameter values. I argue that one of these equilibria corresponds more closely to the American labor market and the other corresponds to the Japanese labor market. The model is consistent with the following stylized facts: (1) labor mobility is lower in Japan than in the United States, (2) outside option values for Japanese workers in mid-career are low, and (3) firm-specific human capital investment is intensive in Japan. (C) 1994 Academic Press, Inc.