Training Contracts, Worker Overconfidence, and the Return from Firm-Sponsored General Training∗

Firms may be reluctant to provide general training if workers can quit and use their gained skills elsewhere. “Training contracts ” that impose a penalty for premature quitting can help alleviate this inefficiency. Using plausibly exogenous contractual variation from a leading trucking firm, we show that training contracts significantly reduce post-training quitting and increase training profits. We demonstrate further that training contracts have especially large effects on training profits in our setting because of their interaction with worker overconfidence. If workers are overconfident about their own productivity at the current firm relative to their outside option, they will be more willing to sign training contracts and less likely to quit after training. Combining weekly productivity data with weekly productivity beliefs, we estimate a structural learning model with biased beliefs that accounts for many key features of the data. While worker overconfidence moderately decreases worker welfare and significantly increases the optimal training contract penalty, it also substantially increases firm profits from training, thereby potentially making firm