Shareholders and Stakeholders: Human Capital and Industry Equilibrium

Producing high technology output and supplying sophisticated services often involves costly investment in industry-specific skills. But the threat of poaching means that it is the individual ‘stakeholder’, not the firm, who must bear the cost. We investigate various mechanisms for funding human capital investment in an industry equilibrium framework where capital market imperfections would (in the absence of intervention) result in underinvestment. The main result is that government provision of loan guarantees (conditional on no-bankruptcy) leads to wage hikes which (by forcing exit of some firms thus increasing monopoly power) raise profits in a socially inefficient manner: income contingent loans and levy subsidy schemes, meanwhile, can result in a socially efficient outcome.