Implicit Labour Contracts and Firm-Specific Human Capital

This paper presents a simple model demonstrating the potential role payed by firm-specific human capital in supporting implicit labour contracts. Firm-specific human capital creates a relationship-specific surplus which not only provides a motivation for continuity of association, but also permits the firm to act as both creditor and insurer to the worker. The model highlights the point that, by facilitating commitment to long-term contracts, the creation of mobility costs for workers may in fact be welfare improving.