Hence, we obtain the following result.
Lemma 7 Under employee coop, the equilibrium investment levels are:
kfc = max{0. ɪ(/' + 1) - 1}
Partnership
Under a partnership decision rights concerning the use of the firm's assets are allocated
to only one employee, the partner5. That is. unanimity among all employees is no longer
required to take a decision. This regime allows for a stronger form of competition to take
place. When the partner is better than the junior employee he improves his bargaining
position through his outside option. But when he is worse, he simply acts like an outside
owner. We suppose again, without loss of generality, that E↑ is the good employee. When
he is the owner (that is, when the owner is the good emplθ}ree ex post) then the bargaining
solution is given by:
Agent: employee Ei employee E∏ outside owner O customer C
share: V - v 0 0 υ
Indeed, in that case the problem reduces to a simple bilateral bargaining game with an
outside option for the customer (which is to get the service from the bad employee outside
the firm’s premises). If. however, the owner is the bad employee ex post (that is here, if
employee E2 is the owner) then the bargaining solution is similar to that under outside
ownership (with emplæee E? acting like an outside owner) and is given by:
Agent: employee Ei emploj-ee E? outside owner O customerC
share: υ — V V — v 0 V
Therefore, if employee Ei is the owner his ex-ante expected gross payoff is given by:
α1(V(⅛1) -E(⅛3)) +a3(V(fc2) -t∙(⅛3)).
And employee £2 s ex-ante expected payoff is Q2(υ(⅛) — V⅛))∙
Hence. E∖ and Ei choose their human capital investments to solve respectively:
max{αι (/(λlog(l ÷ kx) - υ) + o2 (/(ʌɪɑg(l ÷ ⅛)) - ʌlog(l ÷ ⅛>)) ~ M (?)
⅛ι>0
5With two employees this hardly looks like a partnership. Although this case looks artificial with two
employees it should be clear that it corresponds to a more general situation where only the most able
employees are promoted to the rank of partner and are thus given control rights.
15
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