This article explores human capital acquisition decisions when job placement helps determine competition for a worker. With asymmetric information, workers may invest in firm‐specific capital without long‐term contracts. Specific investment increases promotion chances (and hence wage competition), shifting competition back to a time when firms are symmetrically uninformed. If general human capital is the efficient (output‐maximizing) investment, then an equivalent firm‐specific investment maximizes expected career wages. This is a general result for sellers in second‐price auctions: sellers (of labor) invest to maximize the expected second‐highest bidder valuation (wage), not the winner's expected valuation.

We introduce borrowing constraints into the life-cycle theory of labor supply and show that they account for observed profiles in consumption, earnings, and hours worked. They can also account for differences in occupational choice across individuals who differ in initial wealth, marital status, or ability. This formalizes several aspects of observed differences in the labor-force behavior of men and women.

This paper provides a possible explanation for the empirically observed size-wage effect and inter-industry wage differences. It develops a model in which incentives for workers to accumulate general human capital are provided by corporate tournaments, where workers with the highest level of general human capital win promotions. Given that the prizes in such tournaments are determined by outside market conditions, the investment and the equilibrium wages depend on firm and industry characteristics. The model implies that workers in bigger firms and in more technology intensive and profitable firms and industries acquire more human capital and receive higher wages and benefits.

A standard presumption of market microstructure models is that competition between risk-neutral market makers inevitably leads to price schedules that leave market makers zero expected profits conditional on the order flow. This article documents an important lack of robustness of this zero-profit result. In particular, we show that if traders can split orders between market makers, then market makers set less-competitive price schedules that earn them strictly positive profits and hence raise trading costs. Thus, this article can explain why somebody might willingly make a market for a stock when there are fixed costs to doing so. The analysis extends to a limit order book, which by its nature is split against incoming market orders: equilibrium limit order schedules necessarily yield those agents positive expected profits.

A standard presumption of market microstructure models is that competition between risk-neutral market makers inevitably leads to price schedules that leave market makers zero expected profits conditional on the order flow. This article documents an important lack of robustness of this zero-profit result. In particular, we show that if traders can split orders between market makers, then market makers set less-competitive price schedules that earn them strictly positive profits and hence raise trading costs. Thus, this article can explain why somebody might willingly make a market for a stock when there are fixed costs to doing so. The analysis extends to a limit order book, which by its nature is split against incoming market orders: equilibrium limit order schedules necessarily yield those agents positive expected profits.

When creditors do not honor human capital as collateral, firms can mediate financially by offering workers long-term wage contracts. The optimal contract specifies a wage consisting of a spot general skill component plus a component equal to the expected time-averaged value of the worker's specific skills with a competitor. Variations in the smoothed specific component are due only to changes in expectations about the likelihood of quitting a competing firm. The theory also explains interindustry disparities in wage paths and statistical discrimination by firms.

We characterize an equilibrium development process driven by the interaction of the distribution of wealth with credit constraints and the distribution of entrepreneurial skills. When efficient entrepreneurs are relatively abundant, a “traditional” development process emerges in which the evolution of macroeconomic variables accord with empirical regularities and income inequality traces out a Kuznets curve. If, instead, efficient entrepreneurs are relatively scarce, the model generates long-run “distributional cycles” driven by the endogenous interaction between credit constraints, entrepreneurial efficiency and equilibrium wages.