The working of a labour market model with potential entry

In this paper the effects of different institutional scenarios on rent creation and rent distribution in a labour market are studied. Rent is generated by sinking costs in human capital investment and this rent is distributed between firms and workers by the wage set. In the bench-mark scenario the social planner can determine both,the investment in human capital and the wage, such that the rent created is maximal and given entirely to the firm. In the so-called monopolistic worker scenario the worker can determine investment and wage, while in the so-called monopsonistic firm scenario the firm determines the wage and the worker decides over investment. These scenarios are contrasted by the insider-outsider scenario, where the monopolistic incumbent may be outperformed by an entrant. It is shown that the incumbent will always find it advantageous to preempt the outsider in this setting, even if this leads to distortions in her behaviour. While the monopolistic worker and insider have an incentive to invest (almost) efficiently, because they can scim most of the rent created. This is not the case in the monopsonistic firm scenario, where the firm can appropriate most of the rent. There are comparative statics performed in order to show the impact of the different parameters on the results.