Should the firm or the employee pay for upskilling? A contract theory approach

Upskilling involves costly effort on behalf of existing employees to acquire new skills that are required to execute high value-added projects. A firm-financed training scheme allows the screening of applicants but comes with the cost of hidden actions, as some employees might train themselves yet continue working on low-value projects. A policy relying on worker self-training and incentive compatible contracts allows attracting more workers to high-value projects, yet it must grant a positive informational rent to flexible workers. The analysis reveals the optimal contract specific to each of the two training schemes. The profit comparison shows that the training strategy depends on how large is the net value created by upskilling, which is a characteristic of the business or industry.