if E1 is hired: or
Agent: employee E2 employee Em employee Eb customer-owner Cij
share: υ2 -vb vm — vb 0 V2 ÷ 2vb — v2 — vm
Then each employee chooses his initial investment in human capital ki to maximize:
max ⅛ Γ/ (λl log(l + kij)) + A2 ɪog(l + kij)∖ + ɪog(l + kij}- kij) (19)
So that equilibrium investment levels are given by:
Lemma 16 The equilibrium human capital investment levels under customer cooperative
are given by:
⅛ = 7'λl + A2’ ÷ - 1.
That is. the customer coop is the same as the outside ownership. Looking at the case
of f, > 1. now we have the following results.
Proposition 5 When there is no lock-in, and is an excess supply of ordinary employees,
under all ownership structures, employees under-invest. The efficiency ranking of different
ownership structures is the following:
1. outside ownership is the same as the customer coop:
2. partnership is the most efficient ownership structure: under the partnership.
• the partner's incentive achieves the first best:
• the employee s incentives is the same as in the outside (or customer) ownership:
3. employee coop is the worst.
An immediate implication from the above result is that if the one has the highest chance
being the best employee is the partner, then partnership can be even more efficient.
NLARKET STRUCTURE (HORIZONTAL INTEGRATION)
In this section we briefly consider the effects of horizontal integration under the three
different ownership structures. Two basic lessons emerge from this analysis. First, inte-
gration always reduces welfare by distorting investment incentives, although it may raise
the owners' payoff. Second, the effects of integration on incentives vary with the own-
ership allocation. Integration is worst under outside ownership, followed by employee
30
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