Information Hierarchy and Holdup

Stella Y. Park and Christopher Armstrong, Accounting, The Wharton School, and Stephen Glaeser, Kenan-Flagler Business School

Abstract: We will examine the cost of inventor mobility from a talent poaching perspective. It is either prohibitively costly or impossible to contract over all states of the world (Grossman and Hart, 1986; Tirole, 1999). The human capital of the firm’s employees represents one of its most important resources and, at the same time, is also one of the resources over which the firm’s owners (or residual claimants) generally have relatively few control rights (Becker, 1962). Contracts written over states of the world in which employees are no longer employed by the firm may be limited or even unenforceable, resulting in “incomplete contracts.” The inability to write complete contracts can be costly: it can lead to employees exiting the firm with valuable expertise or knowledge that is brought to competitors who did not invest in its creation. A former employee who is subsequently hired by a competitor could leverage her knowledge from and about her prior employer to benefit her new organization and the detriment of her prior employer.