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We develop a product market theory to explain why firms provide their workers with skills that are also useful to their competitors. Firms first decide whether to invest in industry‐specific training, then make wage offers for each others' trained employees and finally engage in imperfect product market competition. Equilibria with and without training can emerge. If competition is soft, firms invest in training if others do. Thereby, they avoid having to pay high wages for trained workers. Furthermore, we draw welfare conclusions from the analysis. Finally, we discuss how our ideas apply to supplier relationships and to general training.

AbstractI examine the effect of product market competition on the yield spread of corporate bonds. I find that firms that face more competitive threats also face a higher cost of corporate bond debt. After controlling for common bond‐level, firm‐level, and macroeconomic variables, my results show that bondholders of firms that are subject to increased competition demand significantly higher credit spreads than holders of otherwise similar bonds. Furthermore, this effect is more pronounced for firms that have assets that are difficult to redeploy. Overall, my findings provide evidence that competitive threats are being reflected in corporate debt prices.

Labour market reforms face very often opposition from the employed workers, because it normally reduces their wages. Also product market regulations are regularly biased towards too much benefitting the firms. As a result there remain many frictions in both the labour and product markets that hinder an optimal functioning of the economy. These issues have recently received a lot of attention in the economics literature and scholars have been looking for politically viable reforms in both markets. However, despite its potential importance, there has been done virtually no research on the interaction between reforms in product and labour markets. We find that when combining reforms, the opposition for reforms decreases considerably. This is because there exist complementarities and the gains in total welfare can be more evenly distributed over the interest groups. Moreover, the interaction of reforms offers a way out for the so-called 'sclerosis' effect.