In medicine, law, consulting, and many other careers, a significant proportion of human capital is created through profession-specific learning-by-doing (LBD. In the absence of long-term wage contracts, if LDB effects are sufficiently large, then young workers should face a negative wage in return for high future wages. However, if workers are liquidity constrained, then young workers compete away those returns to experience by working inefficiently hard. This inefficiency results in higher lifetime earning, causes older workers to exert too little effort, and tends to lower the observable (monetary) returns to experience. Unlike traditional models, this can explain "career concerns" in professions where effort and ability are observable.

A model of a labor market is proposed where the level of individual talent can only be learned on the job and where job positions are scarce. Inability to commit to long-term contracts leaves firms with insufficient incentives to hire novices, causing them to bid excessively for the pool of revealed talent instead. This causes the market to be plagued with too many mediocre workers and inefficiently low output levels, while simultaneously raising the wages for high talents. This problem is most severe where information about talent is initially very imprecise but revealed relatively quickly on the job. I argue that high incomes in professions such as entertainment, team sports, and entrepreneurship, may at least partly be explained by the nature of the talent revelation process in those markets. I suggest historical episodes that could be used to identify the inefficiency and the excessive talent rents predicted by the model.

This paper studies a two-sector model of learning-by-doing that is partially transferable between sectors. There is a potential efficiency gain from intersectoral turnover when the sectors have different complementary production costs or learning curves of different steepness. If workers are liquidity restrained then there is a bias toward increased intersectroal turnover, resulting in socially inefficient career patterns. Excess turnover can even result in lower average productivity of workers in both sectors. If individual productivity is decreasing toward the end of the career, then a liquidity restraint on the young workers will also cause retirement to be delayed beyond the socially efficient retirement age.

We introduce a post-entry liquidity constraint to the standard model of a …rm with stochastic cash ‡ow and irreversible exit decision. We assume that a …rm with no cash holdings and negative cash ‡ow is forced to exit regardless of its future prospects. This creates a precautionary motive for holding cash, which must be traded off against the liquidity cost of holding cash. We characterize the optimal exit and dividend policy and analyze numerically its comparative statics properties. The …rm pays dividends when it is in a sufficiently strong position in terms of cash ‡ow and cash holdings, and the …rm almost surely exits voluntarily to pre-empt forced exit. The direct effect of the liquidity constraint is to impose inefficient exit, but in industry equilibrium it also creates a price distortion that leads to ineffi cient survival. (D81, D92, G35)