Specific Human Capital and Optimal Design of Pension Plans

The optimal design of a corporate pension plan should be able to balance employee incentives and the profits of the enterprise. Given the existence of specific human capital, an employee has a certain "bargaining power" in the enterprise, and this bargaining power must be taken into account in the pension plan design. We set the model based on such considerations, and we first studied the attractiveness of a specific pension plan with respect to the type and the degrees of effort of employees. The following comparative static analysis showed how the changes in a pension plan's factors influenced the employees' participation and degree of effort. Finally, we studied the optimal design of a pension plan, which maximizes the profits of the enterprise under different combinations of factors.