The name is absent

Outside Ownership

Ex-post it is always efficient to undertake production on the firm’s premises, since then
more value is created. Thus, under outside ownership of the firm, owner, employee and
customer bargain over the surplus of production generated in the firm. V(k). As we
explained in the previous section, we take the Shapley value as the bargaining solution in
this case with no competition between employees. This solution is as follows:

• the outside owner gets ʌʃ

• the customer and employee each get -^ji ÷ ⅛.

Thus, in stage 1 the employee now chooses k to maximize

V(⅛)-υ(⅜) . v(fe)

3         2

Hence, relative to the case where production is undertaken without the use of the firm's
asset, the employee’s marginal incentives to invest in human capital are increased if and
only if.

V^,(kⁿ) -υ'(kⁿ} υ^f(kⁿ) υ'(kⁿ)
----3----^{τ ≥} ~1~'

where, kⁿ is the second-best optimal investment when production takes place outside the
firm. Or.

V'(fc^π) - √(fcⁿ) = (∕' - 1). √(fc^π) > 0

Hence, the employee’s incentives to invest in human capital are increased if and only if
f'(kⁿ) > 1: that is, when the firm's asset is complementary with the employee's human
capital.

The above result shows that even if access to production enhancing assets always adds
value ex-post, the presence of these assets may be bad from an ex-ante perspective if it
has a large negative impact on the employee’s incentives to invest in human capital. Also,
and more surprisingly, when the marginal contribution of the firm's asset is low. outside
ownership may be preferable to other ownership structures, even though the outside owner
makes no useful contribution to the provision of services. To see this, consider next the
outcome under either employee or customer ownership.

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