The name is absent

at most their outside options.

OPTIMAL OWNERSHIP ALLOCATION WITH NO COMPETITION

In this section we consider a situation with no competition between employees. The
optimal ownership allocations obtained in this case will serve as useful benchmarks to
understand the relation between competition and ownership analyzed in the next sections.
Thus, we shall consider a model here with one employee one customer and possibly one
outside owner and we shall ask which of them should own the asset or firm.

Before we address this question we shall consider what happens when the employee and
customer decide to transact on their own without using the asset or premises of the firm.
In this case the total ex post surplus from the transaction, υ(k). is split equally between
the employee and the customer and the employ*ee chooses к in stage 1 to maximize

⅞¹-fc∙                           (1)

and ends up underinvesting in human capital. Indeed, from a first-best perspective he
should set к to maximize

u(k) - ⅛.

Now. suppose that the employee uses the firm's asset(sl to serve the customer. He is
then able to generate a total ex-post surplus of V^r(⅛) > ι∙(fc). For convenience, we shall
assume throughout this paper that V (к) = /(υ(fc)), with f^, > и and ʃ" ≤ v. Here, f^, is
the marginal contribution of the firm assets to the marginal value of production. It can
be taken to be a measure of to the Complementaritj^r between the firm's assets and the
employee s investment in human capital. More precisely, when f^f > 1 the firm’s asset is
complementary' to the employee's investment in human capital and consequently increases
the marginal value of the employee’s investment: and when f^f < 1, with the firm’s assets
the marginal value of the employee’s investment wi∏ be reduced.

The first-best when production takes place on the firm’s premises is for the employee
to set ⅛ to maximize V(к) - к, and the first-best level of investment. .⅛∙ is given by:

V'(k*) ≈f'v^,(k∙) = 1.

Obviously, the employee s first-best incentives to invest in human capital are then in-
creased if and only if f^, > 1 around k, where .⅛ solves ι∕(S) = 1.

What happens now in a second-best situation where human capital investment к is not
contractible? We first look at the case where :he firm is owned by a third party.

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