and the other parties obtain respectively, 0 for employees Ξ√7, v for each customer
and V — V for each owner.
Thus, when f' > 1 the bargaining solution under outside ownership is given by:
Agent: employee Sn employee Eij outside owner Oi customer Ci
share: V-V О V — v υ
• When f < 1. on the other hand. V — V <υ — υ. so that the bargaining solution is
determined entirely by the outside options in stage 2 and is given by:
Agent: employee £ц employee Eτj outside owner Oi customer Ci
share: υ — v O V — v υ
These payoffs then translate into the following ex-ante investment choices for the em-
ployees. When f, > 1 they, choose their investment in human capital fci to maximize:
≡ax{⅛(λl°8(l + ⅛)) -∕fe)] -*⅛} (W)
fc¼>υ 4
and when f' < 1 they choose fci to maximize:
max{i[Alog(l + ki) - υ] - ⅛i} (11)
⅛t>0 4
We thus obtain the following solution for the investment choices under outside owner-
ship.
Lemma 10 The equilibrium human capital investment levels under outside ownership are
given by:
max{0,
where,
fcOsf z∕'-W∕'≥ι
I ʌ — 1. otherwise
It is interesting to see competition between firms at work here. When f ≥ 1 perfect
competition gives employees the correct marginal incentives to invest ex ante. But when
f, < 1. employees will over-invest.
Customer Cooperative
Consider now the case where each customer is also the owner of a firm (or has full
control over the firm's assets). The same natural adaptation of the bargaining game