Employee and customer ownership
When either the empiovτe or the customer own the asset the ex-post bargaining solution
is simply:
• ɪ for the employee.
• ⅛ for the customer and.
• zero for the third party.
So that the employee's marginal incentives to invest are given by:
2 *
Thus, under employee or customer ownership, the employee always under-invests re-
gardless of the degree of complementarity between the firm’s assets and the employee’s
human capital.
The optimal ownership allocation
Comparing the efficiency of outside ownership and employee∕customer ownership, we
can see that the employee in a firm under outside ownership invests more than an employee
in a firm under employee∕customer ownership if and only if f, < 1. Higher investment
in human capital, however, does not necessarily translate into greater efficiency. There
may be over investment in human capital! Indeed, under outside ownership the employee
over-invests in human capital if and only if.
l,",-,H÷⅞2.¾y÷w∙1>≡
or,
The reason why overinvestment may occur here is that investment in human capital
strengthens the employee's bargaining position more than it adds to the total value of
production in the firm. Such an outcome is possible whenever the marginal unit of in-
vestment adds more to the employee's outside option than to the value of production in
the firm.