Who Benefits from Workers with General Skills? Countervailing Incentives in Labour Contracts

In a principal-agent model with adverse selection and moral hazard the impact of the agent's transferable human capital on incentives is analysed. It is shown that under asymmetric information the employer (principal) prefers a worker (agent) with general skills to a similarly productive worker with firm-specific skills although the reservation utility of a worker with general (i.e. marketable) skills is higher. The principal's information costs are lower when workers have general skills than in the case where workers possess only firm-specific human capital because of countervailing incentives. The optimal contract for workers with general skills differs from the standard screening contract in that it involves pooling