firms as owned by third parties, employee-owned firms, or customer-owned firms are not
uncommon.
We consider in turn three situations with increasing degrees of competition. In the
first there is a single firm composed of only one employee: there is then no managerial
competition and incentives for human capital acquisition can only be affected by allocating
ownership of the firm to either an outside owner, the emploxee. or customer(s). In the
second, there are two employees inside the firm competing to serve customers): this is
a situation where employees compete in the firm's internal labor market. In the third
situation, we consider two firms with two employees each, where competition takes place
both internally and externally. One of the core questions we shall be concerned with is
which form of ownership allocation maximizes the protection provided by competition of
employees’ human capital investment.
The remainder of the paper is organized as follows. Section 2 outlines the model.
Section 3 considers ownership of firms in the absence of any competition. Here, the main
result is that employee ownership or customer ownership is optimal whenever the firm’s
assets are sufficiently Complementan* with the human capital of the employee. With weak
forms of complementarity, on the other hand, outside ownership may be optimal.
Section 4 allows for competition among employees inside the firm. This is a situation
where the employees’ ex-ante investment is sufficiently firm specific that they are effec-
tive!}' locked-in. Here the main result is that outside ownership is alwa}*s dominated by
either employee or customer ownership. Employee ownership dominates customer own-
ership when customer-owners are heterogeneous ex-post. However, if a firm is owned
by the customers who like the product for sure, customer coop may dominate. More-
over. we distinguish partnerships from employee coops: when some employees arc able
to distinguished themselves as more productive than others, a partnership which restrict
the ownership to those distinguished members (partners) may be optimal: or when all
employees have an equal capability an employee coop may be optimal.
Section 5 allows for competition within and across firms. Our main result is that if
employees are homogeneous and the firm's assets are sufficiently complementary with the
human capital of the employee then ownership is irrelevant (provide, of course, that the
managerial labor market works well). However, when employees are heterogeneous ex-
post. ownership structure matters (partnership may dominate other ownership structures
while employee coop may be the worst) even when there is no lock-in. Section 6 briefly
considers the horizontal integration decision between firms. Final!}*, section 7 offers some
preliminary concluding remarks.