The name is absent

Comparing the employee's incentives for investment in human capital under the three
regimes we can thus conclude that employee or customer ownership is optimal from an ex-
ante perspective if and only if. f^, > 1. In other words, employee and customer ownership
is optimal whenever the complementarity between the firm's assets and the employee s
human capital is high enough. When f' < 1. outside-ownership dominates in general,
except when ∕' ≪ ɪ, in this case it is not clcar whether under-investment under employee
ownership or over-investment under outside ownership is more efficient.

To summarize, our analysis so far yields the following result:

Proposition 1 When there is no competition at all,

1. employee or customer-ownership dominates outside-ownership whenever the firm
asset's marginal contribution to the marginal value of production is high, that is,
f^f > 1;

2. whenever the firms marginal contribution is low. (that is, ɪ < f^t < IJ outside-
ownership dominates both other forms of ownership as long as f' is not too small;
and

3. when the firm's marginal contribution is very low. (f' < ɪj the employee over-invests
under outside-ownership. Then, depending on the extent of overinvestment either
outside or employee/customer ownership may be optimal

The basic intuition behind these results is straightforward. When f^, > 1. an additional
unit of investment adds more to the total value of production than to the bargaining
position of the employee under outside ownership. As a result, the employee tends to
underinvest when the firm is owned by a third party. The employee's incentives to invest
can then be improved by allocating ownership either to the employee or the customer.
Alternatively, when f^f < 1. the employee's incentives to invest are enhanced under outside
ownership. Introducing an outside owner then has similar effects to the introduction of a
"budget-breaker* in Holmstrom's (1992) moral hazard in teams problem. It serves the pur-
pose of providing better marginal incentives to invest. However, contrary to Holmstrom
(1992) the introduction of an outside owner may result in excessively strong incentives to
invest for the employee.

These results are also related to similar observations made recently by Rajan and Zin-
gales (1996) and de Meza and Lockwood (1996). Just as in de Meza and Lockwood (1996)
removing ownership of the asset from the employee may induce him to invest more by
providing him with better marginal incentives to invest. The effect works through the

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