443. The sale of relational capital through tenure profiles and tournaments

Paul Frijters, School of Economics Discussion Paper No. 443 1998, School of Economics, The University of Queensland. Australia.

Full text available as:
PDF - Requires Adobe Acrobat Reader or other PDF viewer.

Abstract

In this paper, a specific form of human capital is analyzed, relational capital, which consists of matches between market parties. Search and information costs make these matches valuable to both parties. Its peculiarity is that the control over such matches is transferred within firms from those who initially control it to anyone who works with it for a period. This characteristic allows someone who approaches the end of his working life to sell his relational capital to junior partners. This sale can explain upward sloping tenure profiles and can result in tournaments if juniors are budget constrained and perfect contracting is not possible. The need to keep the amount of relational capital constant implies a generation balanced workforce within each firm.