Advances in the Economic Analysis of Participatory & Labor-Managed Firms

The purpose of this chapter is to offer new justification for multiskilling practices such as job rotation and extensive training for broad skills and explain why there appear to exist complementarity between multiskilling and the delegation of decision authority to workers.

By developing a new model of incomplete contracting where workers make noncontractable investments in multiple skills, we obtain the key insight that worker investments in firm-specific human capital become strategic substitutes when their skills overlap each other.

The “skill substitution effect” analyzed in this chapter induces the following three major results, unless specialization offers a substantial technological advantage: (1) workers' incentives to invest in firm-specific human capital tend to be stronger; (2) the optimal level of delegation is typically higher; and (3) firms' ex post profits tend to be higher with multiskilling than with specialization.

The novel implication of the chapter is that multiskilling may be desirable from a firm's viewpoint even if there are no technological or informational task complementarities among the combined skills, which have been believed to be primary reasons for multiskilling in prior works.