bargaining position of the employee, as in their model, although here the bargaining solu-
tion is not based on the outside option principle. Another important difference with their
analysis is that here the removal of ownership may be inefficient even though it increases
investment incentives when, as a result, the employee has incentives to overinvest. The
mechanism behind the result of Rajan and Zingales (1996) is different from ours. In their
model ex-ante investment may reduce the value of the asset. By removing ownership of
the asset the negative effect on investment incentives of the reduction in ex-post asset
value is limited, so that investment incentives may be increased.
COMPETITION IN INTERNAL LABOR MARKETS
In this section we consider the case of perfect lock-in where employees‘ human-capital
is perfectly firm specific. Then the only possible form of competition between employees
is within the firm. The most stripped down model of this case is a single firm model with
two employees competing for one or several clients of the firm. If there is a single client
there will be excess supply of services by employees, but if there are n > 3 clients then
there is excess demand. It turns out that the optimal ownership allocation depends on
the strength of demand. We shall first consider the simplest case where there is a single
customer. We then proceed to show how some of our conclusions are reversed in the other
polar case where the number of clients is large relative to the number of employees.
We denote by Vt the value of production in the firm with employee : = 1,2. and by V
the value of production when both employees participate in production. Also, we denote
by ki the investment in human capital of employee i = 1.2.
We distinguish between four possible ownership structures : i) outside ownership: ii)
employee cooperative: iii) partnership and iv) customer cooperative.
For reasons of tractability* we shall restrict attention to the following functional forms
for υl and u2:
v1(⅛ι) ≈ Alog(l + ⅛ι) and L∙2(fc2) = υ with probability ɑɪ I
< >
u1(fc1) = у and u2(k2) = λ log(l + k2) with probability α∏ J
with A > 1, ɑɪ ∈ (0.1) and ɑɪ + ɑ? = 1. Here, the difference lɑɪ - α2∣ is a measure
of heterogeneity between the two employees. As before we set V1 ≈ ʃ(fɪ(^ɪ)) and V2 ≈=
/(υ2(A⅛))- where, f is the same increasing function as in section 3. When there is only one
customer we shall also assume that V(⅛ι, ⅛2) — max{ V'1 (fcl), V2(k2}}. This formalization
captures the idea that although employees may be similar ex ante their ex-post realized
human capital value will always be different. Moreover, with only one customer only
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