Abstract

This paper focuses on human capital in the economy and entry deterrence when human capital is captured by a firm. A dynamic game theory model about one firm and a potential entrant is established to characterize entry deterrence with human capital. This study first argues that higher fixed set-up and transfer costs deter entrants. Second, to efficiently deter the entrants, the firm is inclined to contract workers with high contract termination compensation requirements. Finally, contracts with high termination compensation can accommodate monopolization and reduce competition for skilled labor.

Key words: Entry deterrence, commitment, trained workers, human capital, game theory.